The term bonus–malus (

Latin Latin (, or , ) is a classical language belonging to the Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) around present-day Rome, but through the power of the ...

for 'good-bad') is used for a number of business arrangements which alternately reward (bonus) or penalize (malus). It is used, for example, in the call center and insurance industries.

Call centers

In call centers, a bonus–malus arrangement is a section in the contract between the company buying the call center services (buyer) and the company providing the call center services (call center) allowing for a payment to be made from one company to the other. As part of the contract, both companies agree on a set of Key Performance Indicators (KPIs). These are measurements for how the call center is performing. If the call center is performing poorly, then there would be a malus payment (payment from the call center company to the buyer). If the call center is doing well, then there is a

bonus payment A bonus payment is usually made to employees in addition to their base salary as part of their wages or salary. While the base salary usually is a fixed amount per month, bonus payments more often than not vary depending on known criteria, such a ...

from the buyer to the call center company. Bonus–malus payments are in addition to the normal cost of call center services.

Insurance

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

, a bonus–malus system (BMS) is a system that adjusts the premium paid by a customer according to their individual claim history. Bonus usually is a discount in the premium which is given on the renewal of the

policy Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an organ ...

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 a 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 Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

, 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 In an insurance policy, the deductible (in British English, the excess) is the amount paid out of pocket by the policy holder before an insurance provider will pay any expenses. In general usage, the term ''deductible'' may be used to describe o ...

which is common to all policyholders.

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 reward claim-free years by discounts, commonly known as a "no-claims discount". 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. 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. Most insurers have a policy whereby an unused bonus or NCD will expire in within two years. Insurers will discontinue a prior customers no claims bonus if they no longer have an insurance policy.

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.

Executive compensation

executive compensation Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, variab ...

, particularly at banks, bonus–malus refers to schemes where annual bonuses are held in

escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...

(do not immediately

vest A waistcoat ( UK and Commonwealth, or ; colloquially called a weskit), or vest ( US and Canada), is a sleeveless upper-body garment. It is usually worn over a dress shirt and necktie and below a coat as a part of most men's formal wear. ...

), and can be reduced retroactively ( clawed back) in case of losses in future years. The intention is to align incentives better and encouraging a long-term view in directors, by discouraging the taking of risks which may yield short-term profits (and hence bonuses in early years) but with long-term losses (which, under a traditional bonus system, would not be penalized). Such a system was proposed by

Raghuram Rajan Raghuram Govind Rajan (born 3 February 1963) is an Indian economist and the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. Quote: "I am an Indian citizen. I have always b ...

in January 2008. Author Jim Collins proposed that executives be expected to buy stock with their own money (as was done at IBM in the 1990s) taking on both up-side rewards and down-side risk. In November 2008,

UBS AG UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...

announced a change to its

scheme implementing such a system, which it dubbed a "bonus–malus" system.

French insurance price calculation

In France, the prices of insurance are calculated as a function of the car type, subscribed insurance options, and also bonus/malus value (%), stating how many years the driver used the car without any accident or another event relevant to the insurance. It means that the bonus/malus is assigned to the insured person and also to family members (e.g. wife), who are allowed to drive the car. The bonus can be transferred between insurance companies.

French taxation

In France, cars are taxed (malus) or credited (bonus) if their

carbon emissions Greenhouse gas emissions from human activities strengthen the greenhouse effect, contributing to climate change. Most is carbon dioxide from burning fossil fuels: coal, oil, and natural gas. The largest emitters include coal in China and larg ...

are above or below certain targets. The limits (can) change every year.

French registration document (carte grise)

The environmental tax is also applied as a malus, to all vehicles newly registered after 1 January 2008, affecting all passenger cars emitting more than 109 g of per kilometer emissions (as of 2020). This tax is paid when the registration document (called « carte grise » in French language) is done. Currently, the certificate holder must pay a penalty to the registration, according to the following rates (2020): * < 110 g/km : no malus * 110 g/km : malus of 50 euros * 111 g/km : malus of 75 euros * 112 g/km : malus of 100 euros * 113 g/km : malus of 125 euros * 114 g/km : malus of 150 euros * 115 g/km : malus of 170 euros * 116 g/km : malus of 190 euros * 117 g/km : malus of 210 euros * 118 g/km : malus of 230 euros * 119 g/km : malus of 240 euros * 120 g/km : malus of 260 euros * ... * 140 g/km : malus of 1 901 euros * 150 g/km : malus of 3 784 euros * 160 g/km : malus of 6 724 euros * 170 g/km : malus of 10 980 euros * 180 g/km : malus of 16 810 euros * > 184 g/km : malus of 20 000 euros further taxes may apply according to vehicle classification.

References

* Lemaire, J. (1995). ''Bonus–Malus systems in automobile insurance''. {{Authority control Insurance