Updating Bonus–Malus Indexing Mechanism to Adjust Long-Term Health Insurance Premiums

Abstract

Economic shocks, high inflation, longevity, and new emerging technologies make the long-term health care insurance challenging for insurers. To overcome this problem, an indexing mechanism has been employed to update predicted premiums based on the new information in hand. Such indexing mechanisms have thus far failed to consider the available policyholder’s risk experience at its updating time. This article employs the well-known bonus–malus system to introduce a bonus–malus indexing mechanism that takes into account the policyholder’s risk experience in its updating mechanism. More precisely, it uses the bonus–malus system’s idea to update the premium of each policyholder based upon her or his risk experience as well as updated inflation. The theoretical foundation of this approach has been developed and its practical implementation is shown through a simulation study.