Incorporating a ‘No Claim Bonus’ in Insurance Agency Contract

What is it about?

A bonus received by an agent from an insurer when the insured does not make a claim is called a ‘no claim bonus’ (NCB). An NCB rewards the agent’s risk management (RM) effort that reduces the probability that the insured suffers a loss. This paper designs an incentive compatible contract that induces the agent to choose an RM effort. If the agent’s RM effort cost is lower than a threshold, feasible ranges of NCB and premium values exist such that the insurer can offer an incentive compatible agency contract with an NCB that is acceptable to the agent.

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Why is it important?

Explores the feasibility of incorporating a No Claim Bonus in non-life insurance agency contracts.