Demonstrating Bonus Malus System (BMS) with Fair Deductibles Amount and Control Mechanism of Claim Amount and Frequency on Medical and Health Insurance Portfolio

Abstract

This paper presents the preliminary work of implementing the BMS in the Medical and Health Insurance (MHI). The application of the Bonus Malus System (BMS) is common in automobile insurance, but having it on MHI is something innovative. This study aims to demonstrate a system that can control the claim amount and frequency while at the same time imposing fair deductibles amount on the MHI’s portfolio. It is believed that, this implementation provides a win-win situation to both insurer and insured. To the insurer, this helps to curb the growth of fraudulent claims and to the insured, this protects the policyholders from being penalised of making necessary claims. This study uses Markov Chain transition models to identify the scale for BMS. The expected claim amount and frequency database were extracted from the Project Oversight Group (POG) research project entitle Group Medical Insurance Large Claims Database Collection and Analysis, and simulated using the Monte Carlo simulation in excel. The fair deductibles amount were defined based on the existing deductibles available in Malaysia. Results show that an ideal scales of the BMS which were demonstrated by equitable claim amount and frequency have produced an effective framework of BMS matrix. Varying deductibles amount ranging from RM2,500 to RM10,000 have given options to the insured to plan for their own claim management. Insureds with lower deductible amounts have the highest probability of being penalised as compared to those with higher deductible amounts. With fair estimations of deductible amounts and effective control of claim system, the BMS framework is seen to be efficient and feasible for the application in the MHI industry.