Asymmetric information, self-selection and pricing of insurance contracts: the simple no-claims case

This article presents an optional bonus-malus contract based on a priori risk classification of the underlying insurance contract. By inducing self-selection, the purchase of the bonus-malus contract can be used as a screening device. This gives an even better pricing performance than both an experience rating scheme and a classical no-claims bonus system. An application to the Danish automobile insurance market is considered.