bonus

bonus

[boh-nuhs]
bonus, extra amount in money, bonds, or goods over what is normally due. The term is applied especially to payments to employees either for production in excess of the normal (wage incentive) or as a share of surplus profits. The wage incentive was designed during the late 19th cent. not only to increase production but to reward the more skillful and more energetic workers. The hourly or weekly wage was to be figured as payment for a standard rate of work, and the workers who exceeded that standard were to receive a bonus. However, the system fell into disfavor with labor unions because rate cutting was often resorted to when bonuses became too high. Industrial engineers of the 1930s realized that definite standards of accomplishment and quality must be set to make wage incentives workable. Many firms have used an annual bonus plan for distributing abnormal profits to employees. The term is also applied to payments to former servicemen in addition to regular pensions and insurance. Veterans of World War I lobbied to obtain a bonus for their military service. In 1924 each veteran received an adjusted compensation certificate entitling him to a payment averaging $1,000 to be made in 1945. In 1932 about 15,000 unemployed veterans formed the "Bonus Expeditionary Force," or Bonus Marchers, and marched to Washington to demand immediate payment of the certificates. President Hoover ordered troops to oust them from federal property. In 1936 Congress passed a law permitting the veterans to exchange their certificates for cashable bonds. A number of states voted veterans' bonuses after World War II and the Korean War.

See W. W. Waters, B.E.F.: The Whole Story of the Bonus Army (1933, repr. 1969); V. D. Kennedy, Union Policy and Incentive Wage Methods (1945, repr. 1969); J. K. Louden, Wage Incentives (2d ed. 1959); R. Marriott, Incentive Payment Systems (3d rev. ed. 1968).

In insurance, a Bonus-malus system (BMS) is a system that adjusts the premium paid by a customer according to his individual claim history.

Bonus usually is a discount in the premium which is given on the renewal of the policy if no claim is made in the previous year. Malus is an increase in the premium if there is a claim in the previous year. Bonus-malus systems are very common in vehicle insurance. This system is also called No Claim Discount (NCD) or No Claims Bonus in Britain and Australia.

The fundamental principle of BMS is that the higher the claim frequency of a policyholder, the higher the insurance costs that on average are charged to the policyholder. This principle is also valid in an insurance arrangement consisting of a high maximum deductible which is common to all policyholders.

Bonus malus in Automobile Insurance

Most insurers around the world have introduced some form of merit-rating in automobile third party liability insurance. Such systems penalize at-fault accidents by premium surcharges and rewards claim-free years by discounts.

The most usual BMS divides drivers by classes, where each class has its own discount or surcharge that is applied to the basic premium. A claim-free year implies in a decline of one or more degrees on the Bonus/Malus class table on the anniversary of the contract. A claim entails an increase of a given number of degrees on the Bonus/Malus scale on the anniversary of the contract. Generally, one degree corresponds to a 5% discount or surcharge. The starting class may depend on the driver's age, sex, place of residence, the car's horsepower or even the car's color. Each country has a different legislation, which rules how many degrees an insurer may increase or decrease, the maximum bonus or malus allowed and which statistics insurers can use to evaluate the starting class of a driver.

A BMS usually has an effect on road safety statistics, as it stimulates drivers to be careful and avoid accidents that would lead to the loss of bonus.

Bonus Hunger

There is a basic question under Bonus-malus system based on insurance customer’s point of view, that is, “Should an insurance customer carry an incurred loss himself, or should he make a claim to the insurance company?”. Hence, an insurance customer prefers to choose self-financing an occurred loss by carrying a small loss himself in order to avoid an increased future premium, instead of financing the loss by compensation from the insurance company. This strategy is called bonus hunger of the insurance customer. In this strategy, the insurance customer prefers the most profitable financial alternative, after a loss occurrence. A well-designed Bonus-malus system must take bonus hunger into consideration.

References

LEMAIRE, J. (1995) Bonus-Malus systems in automobile insurance. ISBN 0-7923-9545-X

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