Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

5-2005

Publication Source

ASTIN Bulletin: The Journal of the IAA

Volume

35

Issue

1

Start Page

299

Last Page

319

DOI

10.1017/S0515036100014173

Abstract

In a deregulated insurance market, insurance carriers have an incentive to be innovative in their pricing decisions by segmenting their portfolios and designing new bonus-malus systems (BMS). This paper examines the evolution of market shares and claim frequencies in a two-company market, when one insurer breaks off the existing stability by introducing a super-discount class in its BMS. Several assumptions concerning policyholders and insurers behavior are tested. Diffusion theory is used to model the spread of the information concerning the new BMS among prospective customers. A wide variety of market outcomes results: one company may take over the market or the two may survive with equal or unequal market shares, each specializing in a specific niche of the market. Before engaging in an aggressive competitive behavior, insurers should consequently be reasonably confident in their assumptions concerning the reactions of their policyholders to the new BMS.

Copyright/Permission Statement

This article has been published in a revised form in ASTIN Bulletin: The Journal of the IAA https://doi.org/10.1017/S0515036100014173. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Cambridge University Press.

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Date Posted: 27 November 2017

This document has been peer reviewed.