A Competitive Model of Rating for Insurance Premium Discount under Observable Efforts
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Mahito Okura
Abstract
Experience rating (called “claim experience rating (CER)” in this study), which provides insurance premium discounts without any claims, is widely known. In line with advances in IT, insurance firms can also introduce a new rating (called “effort experience rating (EER)” in this study), which provides insurance premium discounts in an effort to lower the accident probability. This study aims to investigate the rating that is in equilibrium in the competitive market. In particular, we discuss the possibility of asymmetric outcomes in insurance firms choosing different ratings and the critical factor in deciding the ratings of insurance firms. Our main result is that the maximum disutility level for making an effort is a critical factor to decide the ratings of insurance firms and asymmetric outcomes are achieved when it is not high.
Acknowledgments
The author is grateful to the anonymous reviewers. This paper was originally presented at the Asia-Pacific Risk and Insurance Association 2022 Annual Conference.
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Research ethics: Not applicable.
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Informed consent: Not applicable.
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Author contributions: The author has accepted responsibility for the entire content of this manuscript and approved its submission.
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Use of Large Language Models, AI and Machine Learning Tools: None declared.
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Conflict of interest: The author states no conflict of interest.
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Research funding: None declared.
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Data availability: Not applicable.
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