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Pricing Effectiveness and Regulation: An Examination of Premium Rating in Taiwan Automobile Insurance

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  • Chu-Shiu Li

    (Department of Economics, Feng Chia University, 100 WenHua Road, Taichung 40747, Taiwan. E-mails: csli@fcu.edu.tw, andrelin39@so-net.net.tw)

  • Chih Hao Lin

    (Department of Economics, Feng Chia University, 100 WenHua Road, Taichung 40747, Taiwan. E-mails: csli@fcu.edu.tw, andrelin39@so-net.net.tw)

  • Chwen-Chi Liu

    (Department of Risk Management and Insurance, Feng Chia University, 100 WenHua Road, Taichung 40747, Taiwan.)

  • Emilio Venezian

    (Professor Emeritus, School of Business, Rutgers University, United States.)

Abstract

This paper examines premium determination of voluntary automobile insurance policies and risk classification under Taiwan’s heavily regulated rating system. On the basis of a unique data set, we investigate the appropriateness of the official one-size-fits-all rating formula for insurers by calculating an actual premium, a pure premium in terms of incurred loss, and a loading factor to account for different insurance coverage types. Empirical evidence indicates that there are large discrepancies between average actual premiums and average pure premiums, requiring large loading factors. The official formula captures the regular loss pattern but not excess claims, due to biased claims’ behaviour. In addition, average loss ratios for all coverage types are closely correlated and profitability is high.

Suggested Citation

  • Chu-Shiu Li & Chih Hao Lin & Chwen-Chi Liu & Emilio Venezian, 2010. "Pricing Effectiveness and Regulation: An Examination of Premium Rating in Taiwan Automobile Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 35(S1), pages 68-81, December.
    • Handle: RePEc:pal:gpprii:v:35:y:2010:i:1s:p:s68-s81
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    Citations

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    Cited by:

    1. Li, Chu-Shiu & Lin, Chih Hao & Liu, Chwen-Chi & Woodside, Arch G., 2012. "Dynamic pricing in regulated automobile insurance markets with heterogeneous insurers: Strategies nice versus nasty for customers," Journal of Business Research, Elsevier, vol. 65(7), pages 968-976.
    2. Wei‐Jin Wu & Chu‐Shiu Li & Sheng‐Chang Peng, 2020. "The relationships between vehicle characteristics and automobile accidents," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(4), pages 331-377, December.
    3. Chu-Shiu Li & Chwen-Chi Liu & Sheng-Chang Peng, 2013. "Expiration Dates in Automobile Insurance Contracts: The Curious Case of Last Policy Month Claims in Taiwan," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 38(1), pages 23-47, March.

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