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.