The Incentive Effects of Increasing Per‐Claim Deductible Contracts in Automobile Insurance

Abstract

A new rating system of automobile insurance for vehicle damage in Taiwan was launched in 1996, introducing a deductible that increases with the number of claims. In this article, we provide a theoretical rationale for the existence of an increasing per-claim deductible system and show that the new system is most likely an optimal choice for those insured who tend to have lower claims probability when incentives are present. Using a unique dynamic data set, we are able to conduct a natural experiment to examine the incentive effects (both positive and negative) by looking at the change in claim tendency before and after switching between two deductible plans: an increasing per-claim deductible and a zero deductible. Our results provide direct evidence of the effects of deductible structures on claim behavior. Copyright The Journal of Risk and Insurance, 2007.

Perceived Ethicality of Insurance Claim Fraud: Do Higher Deductibles Lead to Lower Ethical Standards?

“…Indeed, prior non-experimental work has shown higher deductibles to be linked to higher insurance claims (Dionne and Gagné, 2001), which could be considered counter to the expectation that higher deductibles would reduce ex-ante moral hazard and thus result in fewer or less severe claims (Dionne, 2000;Li et al, 2007). But in cases where deductible amounts are selected by the insured, moral hazard (whether ex-ante or ex-post) may be confounded with self-selection (whether adverse or advantageous to the insurer), creating the need to isolate the potential hazard effect(s) (Dionne, 2000).…”

Evidence of Asymmetric Information in the Automobile Insurance Market: Dichotomous Versus Multinomial Measurement of Insurance Coverage

“…Dionne, Michaud, and Dahchour (2006) analyze 3-year panel data in France and find robust evidence for moral hazard especially among policyholders of 5-15 years of driving history. In a similar vein, Li, Liu, and Yeh (2007) and Wang, Chung, and Tzeng (2008) also report evidence for moral hazard while utilizing the unique nature of the increasing deductibles scheme in Taiwan. 3 A careful examination suggests that the divide in the literature largely coincides with the nature of the data utilized.…”

Testing Adverse Selection with Two-Dimensional Information: Evidence from Singapore Auto Insurance Market

“…As pointed out by Chiappori and Salanié (2000), when such information is available to both insurers and insurees, failing to control for the insuree's past driving history could overestimate the level of asymmetric information. One commonly used proxy for past driving records in recent studies is the bonus-malus coefficient (for example, see Saito (2006), Li et al (2007), and Some Asian markets also use bonus-malus system, such as Japan and South Korea. In essence, the accident history is incorporated in the driver's bonus-malus coefficient, which is then applied to a basic amount to determine the premium for the next period.…”