The Long-Term Effects of Merit-Rating Plans on Individual Motorists

This paper examines the effects over an individual's driving lifetime of being charged annual premiums for automobile bodily-injury insurance in accordance with particular merit rating plans. Individual accident involvement is modeled as a compound Poisson process and the annual premium amounts as a Markov process. For each plan, the model examines (1) how well an individual's lifetime premium payments reflect his accident likelihood, (2) the discount that is provided for accident-free drivers, (3) the probability that a driver pays a very high annual premium, and (4) the number of years that lapse before a previous accident no longer affects a driver's premium.