¶ … Discount Scheme for Health Insurance
No Claim Discount (NCD) Schemes are Frequency-rating systems and are commonly used in insurance. NCD schemes represent an attempt to categorize policyholders into relatively homogeneous risk groups who pay premiums relative to their claims experience. Those who have made few claims in recent years are rewarded with discounts on their initial premium, and hence are enticed to stay with the company (Boland, 2006). Depending on the rules in the scheme, new policyholders may be required to pay the full premium initially and then will obtain discounts in the future as a result of claim free years. The general insurance actuary modeling an NCD scheme would frequently use Markov chain methods to investigate how premiums and movements take place over time.
No Claims Discount scheme is a form of frequency rating used in health insurance; the practice is to consider the number of years since the last claim. One important condition for this scheme is that the insurer must be notified within a specified period of time upon the occurrence of any loss or damage by the insured.
NCD is expressed as a percentage of basic premiums. The basic premium is an amount dependent on the cover provided by the policy and on certain facts about the insurance, the policyholder and the policyholder's beneficiaries. Among the factors used in rating are the age of the insured, place of residence and whether a voluntary excess is required whereby the insurer is not liable for the first £X of every claim for the policyholder.
Effects of NCD
NCD discourages making of small claims and keeps claim costs and management expenses at a lower level than they would otherwise be. A policyholder contemplating whether to make a claim will usually recognize that claiming may sometimes result in a penalty through loss of future discount (Denuit, Marechal, Pitrebois, & Walhin, 2007). The total penalty is often somewhat arbitrary; it depends on the features of the particular N.C.D. system and the current position of the policyholder on the discount scale.
Furthermore, it is apparent that the claims history of an individual policy are not enable us to go far in correcting the premium for a policyholder for whom the risk differs...
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