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What Is the Bonus-Malus System?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 31 October 2016
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A bonus-malus system is a general term for a wide array of systems that include both a positive and a negative incentive. These systems are widely used within different kinds of business contracts and relationships, as well as in specific industries like insurance. Bonus-malus systems allow for specific results based on either a positive or negative outcome.

One prime example of a bonus-malus system is in a contractual agreement between two business parties. For example, in providing call center services or advertising to a client business, a contracting business might use a bonus-malus type of system to satisfy the client’s position in different outcomes. The businesses will use specific criteria in the contract to provide for either a credit or a debit to the customer, depending on how the services perform during a given time period.

In the insurance world, bonus-malus systems help insurers and other parties to differentiate between policy holders on the basis of their claim history. Generally, this type of system helps to implement different results in insurance premiums and other aspects of policies. With a bonus-malus setup, the company can do this based on how the policy holder used the contract in the past. One of the most general examples of this is when an insurance company creates a payment change, or a change in service rates, that is based on either the number of past claims, or the total monetary value of past claims.

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In some cases, a business might use a bonus-malus system for employees. In these cases, the employee will receive a bonus for good performance and a decrease in compensation for negative performance. Experts point out that, while bonus systems are common in many ypes of business, including sales, a bonus-malus system is not as common. One reason for this is that businesses sometimes have trouble recruiting staff with a model that includes negative reinforcement.

Many have argued that different industries and fields would benefit from using bonus-malus systems to drive increases in worker performance. As many business leaders and government officials have seen, it is hard to implement these systems in many job sectors. This is largely due to common aversions to attaching negative incentives to job performance, which can also result in lower worker morale overall. The resistance to bonus-malus systems provides insight into how people generally feel about what should and should not happen in the work world.

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