Incorporating a “no claim bonus” in insurance agency contract |
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| Authors: | Sumit Sarkar Sai Ranjani Bharathkumar |
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| Affiliation: | XLRI Jamshedpur, India |
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| Abstract: | 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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