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THE USE OF ANNUAL MILEAGE AS A RATING VARIABLE

Published online by Cambridge University Press:  18 December 2015

Jean Lemaire ,
Sojung Carol Park  and
Kili C. Wang
Jean Lemaire
Affiliation:
Wharton School, University of Pennsylvania, 459 JMHH, 3730 Walnut Street, Philadelphia, PA 19104-6302, USA E-Mail: [email protected], Phone: +1-215-898-7765. Fax: +1-215-898-1280
Sojung Carol Park*
Affiliation:
College of Business Administration, Seoul National University, Republic of Korea
Kili C. Wang
Affiliation:
Research Fellow, Risk and Insurance ResearchCenter, College of Commerce, National Chengchi University, Tamkang University, Taiwan E-Mail: [email protected]
*
E-Mail: [email protected]
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Abstract

Auto insurance companies must adapt to ever-evolving regulations and technological progress. Several variables commonly used to predict accidents rates, such as gender and territory, are being questioned by regulators. Insurers are pressured to find new variables that predict accidents more accurately and are socially acceptable. Annual mileage seems an ideal candidate. The recent development in new technologies should induce insurance carriers to explore ways to introduce mileage-based insurance premiums. We use the unique database of a major insurer in Taiwan to investigate whether annual mileage should be introduced as a rating variable in auto third-party liability insurance. We find that annual mileage is an extremely powerful predictor of the number of claims at-fault. 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, a mild bonus-malus system and limited compulsory auto coverage), our results are so strong that we can confidently conjecture that they extend to all developed nations.

Keywords

Auto liability insuranceRating variablesAnnual mileage
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 46 , Issue 1 , January 2016 , pp. 39 - 69
Copyright
Copyright © Astin Bulletin 2015 

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