Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

2015

Publication Source

ASTIN Bulletin

Volume

46

Issue

1

Start Page

39

Last Page

69

DOI

10.1017/asb.2015.25

Abstract

Auto insurance companies are at a crossroads. Several variables commonly used, such as gender and territory, are being questioned by regulators. Insurers are being pressured to find new variables that predict accidents more accurately and are socially acceptable. Annual mileage seems an ideal candidate. The recent development of GPS systems, on-board computers, and telematics devices, and the rapid decrease in price of the new technologies, should induce carriers to explore ways to introduce Pay- As -You-Drive insurance. We use the unique database of a major insur er in Taiwan to investigate whether annual mileage should be introduced as a rating variable in third-party liability insurance. We find that annual mileage is an extremely powerful predictor of the number of claims at-fault. Its significance, as measured by Wald’s chi -square and its associated p-value, by far exceed that of all other variables, including bonus- malus. This conclusion applies independently of all other variables possibly included in rating. The inclusion of mileage as a new variable should, however, not take place at the expense of bonus-malus systems; rather the information contained in the bonus-malus premium level complements the value of annual mileage. An accurate rating system should therefore include annual mileage and bonus-malus as the two main building blocks, possibly supplemented by the use of other variables like age, territory, and engine cubic capacity. While Taiwan has specific characteristics (high traffic density, mild bonus-malus system, limited compulsory auto coverage), our results are so strong that we can confidently conjecture that they extend to all affluent countries.

Copyright/Permission Statement

This article has been published in a revised form in ASTIN BULLETIN 10.1017/asb.2015.25. 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.

Keywords

variable, liability, bonus-malus

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Date Posted: 27 November 2017

This document has been peer reviewed.