A RISK-BASED MODEL APPROACH FOR MOTOR INSURANCE PRICING IN NIGERIA

Abstract

In establishing the burden of costs, insurance companies find it particularly difficult today, in maintaining cross-subsidies amongst different risk levels in a modest market. The estimation of segregated premium within an insurance portfolio is characterized by a pricing procedure that includes the classification of all risks based on known observable characteristics of the insured. Nevertheless, there are many further significant unobservable factors that are not considered a-priori when pricing liability insurance products but may represent significant risk factors. As the market rivalry between insurance companies deepens, there is a greater emphasis on productivity and profitability. Although the budding for cost diminutions is restricted, greater returns and growth can be possible using sophisticated pricing regimes. Using motor insurance liability claims data, a risk-based adjustment pricing model that incorporates costs in a fair and sustainable manner given the individual characteristics of the insured is proposed using a generalized linear model. Results show that claims data is highly peaked, leptokurtic, and varies significantly among the insured. The study established that motor insurance risks are influenced by individual risk characteristics and risk-based adjustment pricing be employed to estimate fair and equitable costs among the insured.