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Policyholder cluster divergence based differential premium in diabetes insurance

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  • Benjiang Ma
  • Qing Tang
  • Yifang Qin
  • Muhammad Farhan Bashir

Abstract

Traditional health insurance pricing, which is based on experience rates, cannot correctly estimate the risk types of policyholders, can lead to serious adverse selection. Due to massive data volumes and developments in data analysis technology, the underwriting process can more accurately reflect the insured's risk type. Therefore, this paper based on policyholder cluster divergence proposes a differential premium approach by employing fuzzy c‐means algorithm (FCM) with an extended initial multistate Markov model to formulate the differential premium that matches the policyholder's risk category. Our results confirm that the proposed differential premium approach better reveals the policyholder's risk type as compared with unified pricing and effectively counteracts adverse selection.

Suggested Citation

  • Benjiang Ma & Qing Tang & Yifang Qin & Muhammad Farhan Bashir, 2021. "Policyholder cluster divergence based differential premium in diabetes insurance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1793-1807, October.
    • Handle: RePEc:wly:mgtdec:v:42:y:2021:i:7:p:1793-1807
    DOI: 10.1002/mde.3345
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    References listed on IDEAS

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    Cited by:

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    2. Bashir, Muhammad Farhan & Pan, Yanchun & Shahbaz, Muhammad & Ghosh, Sudeshna, 2023. "How energy transition and environmental innovation ensure environmental sustainability? Contextual evidence from Top-10 manufacturing countries," Renewable Energy, Elsevier, vol. 204(C), pages 697-709.
    3. Li, Siying & Cifuentes-Faura, Javier & Talbi, Besma & Sadiq, Muhammad & Si Mohammed, Kamel & Bashir, Muhammad Farhan, 2023. "Dynamic correlated effects of electricity prices, biomass energy, and technological innovation in Tunisia's energy transition," Utilities Policy, Elsevier, vol. 82(C).
    4. Bashir, Muhammad Adnan & Dengfeng, Zhao & Amin, Fouzia & Mentel, Grzegorz & Raza, Syed Ali & Bashir, Muhammad Farhan, 2023. "Transition to greener electricity and resource use impact on environmental quality: Policy based study from OECD countries," Utilities Policy, Elsevier, vol. 81(C).

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