A Markov chain based no-claim-discount system

Abstract

In automobile insurance, among other general insurance policies, it is quite common to reduce the premium by a factor in case the insured does not make any claim in a given period. This is popularly known as NCD or no-claim-discount. Equally popular is the practice of increasing (known as 'loading') the premium, in case a claim is made. In effect, either system amounts to a multi-layer premium policy, where any particular policyhoder is required to pick the level depending on the history of claims (s)he made in the immediate past few years.