Deductible Contracts Against Fraudulent Claims: Evidence from Automobile Insurance

Posted: 30 Mar 2001

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Robert Gagné

HEC Montreal - Institute of Applied Economics


Insurance fraud is now recognized as a significant resource allocation problem in many markets. The object of this study is to verify how straight deductible contracts may affect the equilibrium level of falsification in automobile insurance. This type of contract is observed in many markets, even if it is not optimal under costly state falsification. A higher deductible may create incentives to fraud or cheat, particularly when the insured anticipates that the claim has a small probability of being audited. To verify this proposition, we estimate a loss equation for which one of the determinants is the amount of the deductible, using a data set of claims filed for damages following an automobile accident with 20 insurance companies in Quebec in 1992. Since we only have access to reported losses, a higher deductible also implies a lower probability of reporting small losses. In order to isolate the fraud effect related to the presence of a deductible in the contract, we jointly estimate a loss equation and a threshold equation. The threshold is the amount over which an insured decides to report a given loss. It can be interpreted as a personal deductible and it is not observable. Our results indicate, among other things, that with an appropriate correction for selectivity, the amount of the deductible is a significant determinant of the reported loss, at least when no other vehicle is involved in the accident; in other words, when the presence of witnesses is less likely.

Keywords: Insurance Fraud, Deductible, Econometric Model, Truncated Dependent Variable

JEL Classification: D81, C20, G22

Suggested Citation

Dionne, Georges and Gagné, Robert, Deductible Contracts Against Fraudulent Claims: Evidence from Automobile Insurance. Available at SSRN:

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
514-340-6596 (Phone)
514-340-5019 (Fax)


Robert Gagné

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7

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