Study On The Severeness Of Chinese 2007 BMS In Automobile Insurance And Its Effect On Adverse Selection

After China's entry into WTO, many foreign insurance companies have entered into China's insurance market, so the market becomes more and more competitive. With the competition becoming more ruthless, how to adopt a rational competitive price has become the main problem that all insurance companies must face. Being one of the important competitive methods, bonus-malus system has been used widely in automobile insurance industries. According to the current situation of the BMS of China automobile insurance, the paper uses the non-life actuarial theory and the economics theory to study on the severness of the BMS of China 2007 business auto insurance and the effect of BMS on adverse selection of auto insurance.First of all, this paper introduces BMS include both the prior premium and the posterior premium and explains the prior premium including risk rate, net premium, security loading and cost loading. Designing BMS is in order to determine the posterior premium. The paper introduces the mathematical model of BMS, the asymptotic distribution of BMS and the distribution of the number of claim and points out the encouraging function to both the insure and the insured by BMS.According to the estimated parameter of automobile insurance, the author does research about the transition matrix and the mean asymptotic premium of the new BMS which was carried out in April, 2007 in China and making use of three kinds of risk model to rectify the next premium of an optimal BMS and analyzes the severness of it by the index of RSAL, ECL, elasticity, the coefficient of variation. Then, the author compares it with old BMS of 5 property insurance by factor analysis method researching the above indexes, obtains the BMS of china 2007 business auto insurance is more severe than the old and provides the proposal for the development of BMS in China in the future, which is to increase the degrees of discount and the discount rate, improve penalty rate of the violation driver and add the account of claim and the violation records to the transition rules of BMS.According to economic theory, the paper uses optimal method to study how the transition rules, the number of classes and the premium scale affect the consumer behavior of insurance purchasing. Under heterogeneous and non-heterogeneous policies portfolios, this article finds the insured's optimal purchase amount, the critical condition characterizing automobile insurance as an inferior good and a Giffen good on the condition of smaller elasticity. The paper researches how the effect of BMS 2007 China on the adverse selection by the above conclusion, obtains the elastic of the BMS of auto insurance and draws a conclusion that auto insurance is a Giffen good in most condition. The study shows that the good drives who has a low frequency of claim see auto insurance as a Giffen good, on the contrary, the bad drives who has a high frequency of claim see it as normal good. Because the BMS does not only decrease the good drives demand for coverage but also worsens adverse selection, improving the premium can decrease adverse selection on the condition of BMS much less than unity.