Motor private vehicle rating model

Abstract

Most motor insurance companies in Kenya collect about 5-l 0 rating factors in their proposal forms. Despite having these data, these companies have in the past used the minimum rates prescribed by the Insurance Regulatory Authority (IRA). This implies that they are less likely to be aware of rating factors and their importance in pricing. This may justify one of the major reasons as to why motor insurance companies have been loss making. Although the minimum rates were specified, there was no regulation that compelled insurance companies not to price using rating factors. Thus although they collected data on the rating factors, they used the minimum rates possibly due to competitive pressure and market practice. However, IRA has recently issued a circular1 to insurance companies that abolishes the use of minimum rates from 2018 thus insurance companies will be required to price based on their own experience. Rating factors fom1 the basis for pricing. Therefore, the overall objective of this study is to assess the use of rating factors to price motor premiums in light of the new IRA regulations. The past experience and data will be used to evaluate the use of relevant rating factors to price motor insurance policies and develop a simplified pricing model to compute premiums. A motor rating factor model is a simplified model that enables you to calculate the premium to be charged on a particular motor depending on the various rating factor such as type of cover, year of manufacture, engine rating, body type, make, color, carrying capacity, value of the car, age and profession of policyholder. Each of these factors contribute to the pure risk premium. The total premium payable is the combination of pure risk premium, expense premium, commission premium, profit loadings premiums and any other optional benefits. The findings of this model show that the premium rate varies significantly from the current model that assumes a fixed minimum rate on the value of the car.