Volume : 2, Issue : 9, September - 2013

An Application of Stochastic Modelling to Ncd System of General Insurance Company

Jugal Gogoi, Navajyoti Tamuli

Abstract :

In most of general insurance particularly automobile insurance premiums are determined by use of a No–ClaimDiscount (NCD) system. NCD is a system that adjusts the premium paid by a customer according to his/her individual claim history. The fundamental principle of NCD system is that the higher frequency of policyholder the higher the insurance cost that on an average are charged to the policyholder. In this paper we trace for a stochastic model to represent the NCD system. Here we consider a discrete time parameter Markov Chain, Where the state–space consists of a different level of a premium and the state of a particular insured shift randomly from a year to the next. The randomness of the transition is governed by the transition probability of causing an accident in a given year. For doing this we consider a positive integer valued state and the annual premium is a function of these states