As part of our CAS Research Review series, the CAS is highlighting important papers and articles you may have missed! Here we speak with Asrar Alyafie, Corina Constantinescu and Jorge Yslas, authors of An Analysis of the Current Saudi Arabian No-Claim Discount System and Its Adaptability For Novice Women Drivers in the latest CAS E-Forum.
- What inspired this study, and what are its primary objectives?
The inspiration for this study stems from the 2017 decree by King Salman allowing women to drive in Saudi Arabia, which led to an unusual situation of a large influx of new drivers entering the Saudi insurance market within a short period. Moreover, in the same year, the Saudi Arabian Monetary Agency introduced a no-claim discount (NCD) system for the auto insurance market due to a high number of road accidents. This system rewards drivers who don’t report accidents for at least one consecutive year, with the discount increasing for each subsequent year, up to five years. Hence, this study aimed to analyze the current NCD system with the following questions in mind: Are the Saudi NCD’s current rules ensuring long-term financial stability for policyholders and insurance companies? And, is this system adaptable for the new generation of women drivers?
- Can you provide a brief overview of the current rules of the Saudi no-claim discount system?
The Saudi NCD system offers discounts based on a policyholder’s claim history, ranging from 10% to 50% for third-party policies and 15% to 60% for comprehensive coverage. Insured drivers are categorized into six classes with varying discount levels. New policyholders start without any discount, gradually accumulating discounts for each claim-free year, up to five years. However, a claim results in the loss of some or all of the discount. For third-party coverage, which is mandatory for drivers in Saudi Arabia and the main focus of our study, the discounts for each claim-free year increase by 10% on the base premium, up to a maximum of 50%, and having at least one claim is penalized with a loss of up to 20% of the discount.
- Can you describe the techniques used in this study and its most significant findings?
The Saudi NCD system is a particular instance of the auto insurance pricing schemes known as Bonus Malus systems (BMSs). To mathematically analyze these systems, it is common to assume that individual drivers’ claim frequencies follow a Poisson distribution and employ a Markov chain to model a policyholder’s transitions between the system’s different classes. This approach formed the foundation of our analysis.
Based on real-life data provided by a Saudi Arabian insurance company, we considered a mean frequency value of 10%. Another advantage of this assumption is that it enabled us to compare with studies of other systems worldwide. In particular, we selected the Malaysian and Brazilian ratemaking systems for comparison, as they feature a similar number of classes. This setup enabled us to employ various actuarial tools to assess the system’s effectiveness in categorizing insured individuals. The study reveals several significant findings.
First, the Saudi and Brazilian systems take approximately 42 and 37 years, respectively, to achieve full stability. This presents a drawback, as the primary purpose of a BMS is to quickly differentiate between safe and reckless drivers. In contrast, the Malaysian system stabilizes in only 5 years. Second, the average yearly premiums paid by policyholders in the long run for the Saudi, Malaysian, and Brazilian BMSs are close
to their minimum premium levels, disadvantaging new policyholders who pay higher premiums than long-term customers. Additionally, the Saudi NCD imposes the highest first-year surcharge, penalizing new policyholders the most. Specifically, this results in over-penalizing the substantial influx of novice women drivers. Lastly, the system does not adapt well to changes in claims frequency. Taken together, these findings lead us to conclude that the current Saudi NCD system needs some adjustments to prepare for the new generation of women drivers.
To access the full paper and its findings, visit the CAS E-Forum site.