Nonlinear Insurance Cost Calculation Using Mileage-Based RMF
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Solution Overview
Problem
Current insurance premium calculation methods use a linear per-mile approach, assuming equal risk for each mile driven, which does not account for varying driving skills and usage patterns, leading to inaccurate cost alignment with actual risk levels.
Innovation Solution
Implementing a nonlinear insurance cost calculation system using a Rate Per Mile Factor (RMF) that varies based on annual mileage, reflecting improved driving skills with increased mileage, and applying a continuous function to determine premiums that align more accurately with correlated loss data.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Ease of manufacture
If a linear per-mile approach is used to calculate insurance premiums, then the calculation method is simple and easy to implement, but it does not accurately reflect varying driving skills and usage patterns, leading to inaccurate cost alignment with actual risk levels
Solution Approach 1:
The patent applies parameter changes by transitioning from a constant per-mile rate to a variable Rate Per Mile Factor (RMF) that changes based on annual mileage. The RMF is calculated using a nonlinear function that adjusts the rate according to the driver's total annual mileage, thereby changing the pricing parameter dynamically rather than using a fixed linear rate. This resolves the contradiction by maintaining calculation simplicity while improving risk assessment accuracy through parameter variability.
Solution Approach 2:
The patent implements dynamics by making the insurance rate adaptive to the driver's usage pattern. Instead of a static per-mile charge, the system dynamically adjusts the Rate Per Mile Factor based on the driver's annual mileage performance. Drivers who exceed their estimated mileage experience higher effective rates, while those underutilize experience lower effective rates. This dynamic adjustment resolves the contradiction by keeping the calculation method straightforward while accurately reflecting actual risk exposure.
2Stability of the object's composition
If a fixed premium is charged for a given policy period, then the pricing structure is simple and stable, but it does not align premiums with actual usage and risk levels
Solution Approach 1:
The patent applies preliminary action by requiring drivers to estimate their annual mileage before purchasing insurance. This preliminary estimation establishes a baseline expected usage that is used to calculate the initial premium. After the policy period, actual mileage is measured and compared against the estimate, and adjustments are made accordingly. This preliminary action maintains pricing stability during the policy period while enabling precise alignment with actual risk through post-period adjustment.
Solution Approach 2:
The patent implements feedback by comparing actual mileage against estimated mileage and adjusting premiums based on the discrepancy. The system provides feedback to drivers about their usage patterns and the corresponding financial impact. This feedback loop resolves the contradiction by maintaining a stable pricing structure during the policy period while ensuring eventual alignment with actual risk levels through usage-based adjustments.
3Device complexity
If annual mileage is classified into a small number of tiers, then the rating structure is simple and easy to manage, but it applies the same rating factor to the entire tier, reducing precision in cost alignment
Solution Approach 1:
The patent applies parameter changes by replacing the discrete tier-based rating structure with a continuous nonlinear function that calculates the Rate Per Mile Factor based on any annual mileage value. Instead of assigning drivers to broad mileage tiers with fixed rating factors, the system continuously adjusts the RMF parameter according to the driver's actual annual mileage performance. This resolves the contradiction by reducing structural complexity while significantly improving pricing precision.
4Ease of operation
If the same rating factor is applied to the entire mileage tier, then the rating application is consistent and straightforward, but it does not account for individual variations in driving skills and usage patterns
Solution Approach 1:
The patent applies local quality by making the rating factor specific to each driver's actual mileage performance rather than applying a uniform factor across entire tiers. Each driver receives a customized Rate Per Mile Factor based on their individual usage pattern and the nonlinear relationship between annual mileage and risk. This resolves the contradiction by maintaining ease of operation through a straightforward calculation process while achieving high adaptability to individual driver characteristics.
Data Source
AI summary
A system and method for calculating and applying insurance costs. For vehicle insurance under one embodiment of the present invention, insurance costs are calculated on a per-mile basis in a nonlinear fashion, assigning different levels of risk based upon the distance driven by a customer. In one embodiment of the present invention, the first miles or kilometers driven by a customer are assigned a greater level of risk than later-driven miles or kilometers. The present invention provides an actuarial method that more closely conforms the cost of insurance for a particular vehicle to its annual mileage by creating a Rate Per Mile Factor (RMF), where the RMF is expressed as a function of annual mileage.