Optimal Claim Decisions by Policyholders in Automobile Insurance with Merit-Rating Structures

Merit-rating structures in automobile-insurance systems require the insured to decide whether to file a claim for an accident when he is at fault. This decision can only be analyzed in the light of future developments and future decisions, and thus must be formulated as a sequential decision process that can be solved by dynamic programming. If future developments are estimated in light of new experience, the decision problem can be analyzed by adaptive programming. The approach is illustrated by sample calculations providing a number of observations that are of interest from the insurance industry's point of view.