An Empirical Analysis of the Effects of Increasing Deductibles on Moral Hazard

16 Pages Posted: 5 Aug 2008

See all articles by Jennifer L. Wang

Jennifer L. Wang

National Chengchi University - Department of Risk Management and Insurance

Ching-Fan Chung

affiliation not provided to SSRN

Larry Y. Tzeng

National Taiwan University - Department of Finance

Abstract

Using information on timing and number of claims in a unique data set pertaining to comprehensive automobile insurance with the increasing deductible provision in Taiwan, the authors provide new evidence for moral hazard. Time-varying correlations between the choice of the insurance coverage and claim occurrence are significantly positive and exhibit a smirk pattern across policy months. This empirical finding supports the existence of asymmetric information. A subsample estimation depicts insured drivers' significant responses to increasing deductibles, which implies the existence of moral hazard. According to the probit regression results, the increasing deductible makes policyholders who have ever filed claims less likely to file additional claims later in the policy year. The empirical findings strongly support the notion that the increasing deductible provision helps control moral hazard.

Suggested Citation

Wang, Jennifer L. and Chung, Ching-Fan and Tzeng, Larry, An Empirical Analysis of the Effects of Increasing Deductibles on Moral Hazard. Journal of Risk & Insurance, Vol. 75, Issue 3, pp. 551-566, September 2008, Available at SSRN: https://ssrn.com/abstract=1202442 or http://dx.doi.org/10.1111/j.1539-6975.2008.00274.x

Jennifer L. Wang (Contact Author)

National Chengchi University - Department of Risk Management and Insurance ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Ching-Fan Chung

affiliation not provided to SSRN ( email )

No Address Available

Larry Tzeng

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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