Bonus-Malus Insurance System

Bonus-malus is a Latin term for "good-bad." This type of insurance system records good and bad events in your history to determine your premiums today. Premiums go up when you have a circumstance that is "bad;" likewise, avoiding claims is "good" and will reduce your premiums. In many standard insurance agreements today, the bonus-malus system is in place. Further, as a whole, the insurance community operates on a bonus-malus system.

Individual Bonus-Malus

As an individual, when you get in a car accident and are at fault, your rates may increase. This occurs because you have taken a chunk out of the general insurance pool. The theory behind insurance is that each individual contributes to this pool and agrees to only take out what he or she needs. If one person needs more than the other, that person will have to contribute more. When your rates go up, you are making up for the fact you have used the common pool more than other insureds listed with the same company. Today, many insurance companies promise your rates will "not go up" due to an accident. This may only apply on the first occurrence. In nearly every case, an insurer will raise your rates if you routinely make claims. 

Group Bonus-Malus

On a group level, the more claims an insurance company receives, the higher premiums will climb. The insurance company operates for a profit. In exchange for pooling and managing risk, insurance agents and brokers charge a fee. This fee must be large enough to generate profits each year; further, the total capital held by an insurance company must be high enough to pay claims. Therefore, if a number of insureds make claims in a given month or year, the insurance company must respond by raising rates for each policy holder, regardless of individual action.

Systemic Bonus-Malus

Over time, when enough individual and group malus leads to higher rates, the entire cost of insurance will rise. This is one argument used in modern-day debates over prevention of high insurance rates. For example, in the 2009-2010 health care debate, many critics of the health care industry pointed out it does not empower consumers to make smarter decisions about their medical claims. By "using" their insurance too much, many Americans inadvertently drive up their premiums each year. Frequent use of the system benefits doctors and insurance companies, so the spiral continues in the upward direction. This systemic problem is one factor at play in very high health care costs each year.

Large Malus Event

While the systemic inflation of prices may occur over time, there may also be one single event that increases prices in a short period of time. For example, when a number of insurance companies were stuck with abnormally large bills after the 9-11 catastrophe, insurers began to question how they could better handle this issue in the future. Now, all companies pay an additional premium each year to cover one-time losses due to terrorist attacks.  This is a clear example of a single act of "malus" that raised insurance costs nationwide.

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