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Asymmetric Information, Self‐selection, and Pricing of Insurance Contracts: The Simple No‐Claims Case

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Journal of Risk & Insurance

Published online on

Abstract

This article presents an optional bonus‐malus contract based on a priori risk classification of the underlying insurance contract. By inducing self‐selection, the purchase of the bonus‐malus contract can be used as a screening device. This gives an even better pricing performance than both an experience rating scheme and a classical no‐claims bonus system. An application to the Danish automobile insurance market is considered.