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

Chu‐Shiu Li, Chwen‐Chi Liu and Jia‐Hsing Yeh

Journal of Risk & Insurance, 2007, vol. 74, issue 2, 441-459

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.

Date: 2007
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https://doi.org/10.1111/j.1539-6975.2007.00220.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:74:y:2007:i:2:p:441-459

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