IDEAS home Printed from https://ideas.repec.org/a/sae/sagope/v12y2022i4p21582440221134219.html
   My bibliography  Save this article

Exploring the Effects of Classical Auto Insurance Rating Variables on Premium in ARDL: Is the high Policyholders’ Premium in Ghana Justified?

Author

Listed:
  • Jacob Azaare
  • Zhao Wu
  • Bright Nana Kwame Ahia

Abstract

To better understand the actual rating variables that affects Auto insurance Policyholders’ premium, this paper attempts to provide empirical evidence to justify which ones are significant and needed to be considered by insurers by adopting the autoregressive distributed lag (ARDL) model. In satisfying all the conditions for ARDL application, unit root, Heteroskedasticity, normality, dynamic stability and serial correlation tests were conducted. We estimate the effects of each rating variable on Premium taking into consideration whether the policy of the insured is Third-Party or Comprehensive. These rating variables in the ARDL model serves as the independent variables that establishes the short and long-run relationships between them and the Premium as the dependent variable. The results suggest that not all the classical rating variables used in the market significantly impact Premium. Whiles, to some extent, we found a varying degree of variables impact on Premium depending on the insurance type, the autos cubic capacity, which plays a cogent role on the basic Premium in Ghana, is insignificant. Also, policyholders’ age characteristics are statistically significant but are excluded in the premium calculations. Thus, this paper shows the need to consider all the other possible rating variables, including policyholders’ age into the Ghanaian insurance pricing system, whiles autos cubic capacity considering the weight it put on the basic Premium should be re-examined. This would help to obtain a financially balanced and optimal pricing system for policyholders.

Suggested Citation

  • Jacob Azaare & Zhao Wu & Bright Nana Kwame Ahia, 2022. "Exploring the Effects of Classical Auto Insurance Rating Variables on Premium in ARDL: Is the high Policyholders’ Premium in Ghana Justified?," SAGE Open, , vol. 12(4), pages 21582440221, October.
    • Handle: RePEc:sae:sagope:v:12:y:2022:i:4:p:21582440221134219
    DOI: 10.1177/21582440221134219
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/21582440221134219
    Download Restriction: no
    File URL: https://libkey.io/10.1177/21582440221134219?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Azaare Jacob & Zhao Wu, 2020. "An Alternative Pricing System through Bayesian Estimates and Method of Moments in a Bonus-Malus Framework for the Ghanaian Auto Insurance Market," JRFM, MDPI, vol. 13(7), pages 1-15, July.
    2. K. P. Sapna Isotupa & Mary Kelly & Anne Kleffner, 2019. "Experience-Rating Mechanisms in Auto Insurance: Implications for High-Risk, Low-Risk, and Novice Drivers," North American Actuarial Journal, Taylor & Francis Journals, vol. 23(3), pages 395-411, July.
    3. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    4. Eze Simpson Osuagwu, 2020. "Empirical Evidence of a Long-Run Relationship Between Agriculture and Manufacturing Industry Output in Nigeria," SAGE Open, , vol. 10(1), pages 21582440198, January.
    5. Alhassan, Abdul Latif & Biekpe, Nicholas, 2016. "Determinants of life insurance consumption in Africa," Research in International Business and Finance, Elsevier, vol. 37(C), pages 17-27.
    6. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    7. Abdul Latif Alhassan, 2016. "Insurance market development and economic growth," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 43(3), pages 321-339, March.
    8. Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
    9. Clive, W.J. & Lin, Jin-Lung, 1995. "Causality in the Long Run," Econometric Theory, Cambridge University Press, vol. 11(3), pages 530-536, June.
    10. Mercedes Ayuso & Montserrat Guillen & Jens Perch Nielsen, 2019. "Improving automobile insurance ratemaking using telematics: incorporating mileage and driver behaviour data," Transportation, Springer, vol. 46(3), pages 735-752, June.
    11. Gourieroux, C. & Jasiak, J., 2004. "Heterogeneous INAR(1) model with application to car insurance," Insurance: Mathematics and Economics, Elsevier, vol. 34(2), pages 177-192, April.
    12. Mohsen Bahmani-Oskooee & Taggert Brooks, 2003. "A new criteria for selecting the optimum lags in Johansen's cointegration technique," Applied Economics, Taylor & Francis Journals, vol. 35(8), pages 875-880.
    13. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    14. Jean‐Philippe Boucher & Michel Denuit & Montserrat Guillen, 2009. "Number of Accidents or Number of Claims? An Approach with Zero‐Inflated Poisson Models for Panel Data," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(4), pages 821-846, December.
    15. Sarabia, José María & Gómez-Déniz, Emilio & Vázquez-Polo, Francisco J., 2004. "On the Use of Conditional Specification Models in Claim Count Distributions: an Application to Bonus-Malus Systems," ASTIN Bulletin, Cambridge University Press, vol. 34(1), pages 85-98, May.
    16. Frangos, Nicholas E. & Vrontos, Spyridon D., 2001. "Design of Optimal Bonus-Malus Systems With a Frequency and a Severity Component On an Individual Basis in Automobile Insurance," ASTIN Bulletin, Cambridge University Press, vol. 31(1), pages 1-22, May.
    17. Mary Kelly & Norma Nielson, 2006. "Age as a Variable in Insurance Pricing and Risk Classification," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 31(2), pages 212-232, April.
    18. Serpil Bülbül & Kemal Baykal, 2016. "Optimal Bonus-Malus System Design in Motor Third-Party Liability Insurance in Turkey: Negative Binomial Model," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(8), pages 205-205, August.
    19. Paefgen, Johannes & Staake, Thorsten & Fleisch, Elgar, 2014. "Multivariate exposure modeling of accident risk: Insights from Pay-as-you-drive insurance data," Transportation Research Part A: Policy and Practice, Elsevier, vol. 61(C), pages 27-40.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Verónica Cañal-Fernández & Julio Tascón Fernández, 2018. "The long run impact of foreign direct investment, exports, imports and GDP: evidence for Spain from an ARDL approach," Working Papers 0128, European Historical Economics Society (EHES).
    2. Ahmed, Khalid, 2015. "The sheer scale of China’s urban renewal and CO2 emissions: Multiple structural breaks, long-run relationship and short-run dynamics," MPRA Paper 71035, University Library of Munich, Germany.
    3. Ahmed Raza ul MUSTAFA* & Mohammad NISHAT**, 2017. "ROLE OF SOCIAL PROTECTION IN POVERTY REDUCTION IN PAKISTAN: A Quantitative Approach," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(1), pages 67-88.
    4. Amjad Ali & Muhammad Irfan Chani, 2013. "Disaggregated Import Demand Function: A Case Study of Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 1(1), pages 1-14, January.
    5. Halil Alt ntas & Melike Kum, 2013. "Multivariate Granger Causality between Electricity Generation, Exports, Prices and Economic Growth in Turkey," International Journal of Energy Economics and Policy, Econjournals, vol. 3(Special), pages 41-51.
    6. Constantinos Alexiou & Persefoni Tsaliki & Lefteris Tsoulfidis, 2008. "The Greek Hyperinflation Revisited," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 11(1), pages 19-34, Summer.
    7. Olena STRYZHAK & Ramazan SAYAR & Yılmaz Onur ARI, 2022. "Geopolitical risks, GDP and tourism: an ARDL-ECM cointegration study on Ukraine," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 14(1), pages 85-113, May.
    8. Puah, Chin-Hong & Huan, Suk-Hie & Thien, Fung-Thai, 2018. "Determinants of Chinese demand for tourism in Malaysia," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 14(3), May.
    9. Shahiduzzaman, Md. & Alam, Khorshed, 2014. "The long-run impact of Information and Communication Technology on economic output: The case of Australia," Telecommunications Policy, Elsevier, vol. 38(7), pages 623-633.
    10. Phouphet Kyophilavong & Gazi Salah Uddin & Muhammad Shahbaz, 2016. "The Nexus between Financial Development and Economic Growth in Lao PDR," Global Business Review, International Management Institute, vol. 17(2), pages 303-317, April.
    11. Ali, Amjad & Ur Rehman, Hafeez, 2015. "Macroeconomic Instability and Its Impact on Gross Domestic Product: An Empirical Analysis of Pakistan," MPRA Paper 71037, University Library of Munich, Germany.
    12. Ferda Halicioglu, 2013. "Dynamics of obesity in Finland," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(5), pages 644-657, October.
    13. Halicioglu, Ferda & Andrés, Antonio R. & Yamamura, Eiji, 2012. "Modeling crime in Japan," Economic Modelling, Elsevier, vol. 29(5), pages 1640-1645.
    14. Ahmad, Najid & Du, Liangsheng, 2017. "Effects of energy production and CO2 emissions on economic growth in Iran: ARDL approach," Energy, Elsevier, vol. 123(C), pages 521-537.
    15. Halicioglu, Ferda, 2011. "A dynamic econometric study of income, energy and exports in Turkey," Energy, Elsevier, vol. 36(5), pages 3348-3354.
    16. Muzammil, Muhammad, 2015. "Impact of Financial Development on Trade Balance: An ARDL Cointegration and Causality Approach for Pakistan," MPRA Paper 68587, University Library of Munich, Germany.
    17. Phouphet KYOPHILAVONG & Gazi Salah Uddin & Muhammad Shahbaz, 2014. "The Nexus Between Financial Development and Economic Growth in Laos," Working Papers 2014-447, Department of Research, Ipag Business School.
    18. Turan Katircioglu, Salih, 2013. "Interactions between energy and imports in Singapore: Empirical evidence from conditional error correction models," Energy Policy, Elsevier, vol. 63(C), pages 514-520.
    19. Hasanov, Fakhri J. & Shannak, Sa'd, 2020. "Electricity incentives for agriculture in Saudi Arabia. Is that relevant to remove them?," Energy Policy, Elsevier, vol. 144(C).
    20. Shahbaz, Muhammad, 2012. "Does trade openness affect long run growth? Cointegration, causality and forecast error variance decomposition tests for Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2325-2339.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:sagope:v:12:y:2022:i:4:p:21582440221134219. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.