Modification of the current Malaysian No-Claim Discount system using Markov Chains

The No-Claim Discount(NCD) System that Malaysian is using currently is considered as the simplest system in the world. However, it does not treat fairly to the policyholders. Thus, modifications to the system are required. In this study, three proposed systems using Markov Chain method are developed and then compare with the current NCD System by using three tools; the cost of making claim (penalty charges), the premium income receive by the insurer and the efficiency of the NCD system. The result from this research proposed that Modified NCD system 2 is the best practical system to be used in Malaysian NCD system.