The business model of the paper examines the Bonus-Malus system in MTPL market which is compulsory in Armenia. The model examines frequency and severity of claims by the compensation size in order to construct more relevant Bonus-Malus system. Since 2013 there was a standard BM model in Armenian MTPL market, by the system of 4 malus classes for each claim. However, the system has gone out of balance for the last 4-5 years and last year the disequilibrium of the system has reached up to 93%. During the last year because of BM disequilibrium of the MTPL market insurance companies of Armenia lost almost 7% of yearly premium.

In order to introduce the most corresponding model, we have examined the main causes of disequilibrium and found out the model that can take into account not only the quantity of the claims but also the amount of the claim. The new model has entered into force since March of 2022. And is introduced as you pay more maluses for each claim depending on the claim compensation amount.

The model takes into account claims quantity and amount, for each claim the insured person gets from 3-8 malus classes depending on the compensation amount, and gets 1 bonus class for not claim year. The model has been tested for 10 years by Markov chain, and it keeps the equilibrium for 10 year period.

Find the Q&A here: Q&A on 'Insurance Practice in Different Markets'