The Cost of Legal Restrictions on Experience Rating

33 Pages Posted: 28 May 2020

See all articles by Levon Barseghyan

Levon Barseghyan

Cornell University

Francesca Molinari

Cornell University

Darcy Steeg Morris

U.S. Census Bureau

Joshua C. Teitelbaum

Georgetown University Law Center

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

We investigate the cost of legal restrictions on experience rating in auto and home insurance. The cost is an opportunity cost as experience rating can mitigate the problems associated with unobserved heterogeneity in claim risk, including mispriced coverage and resulting demand distortions. We assess this cost through a counterfactual analysis in which we explore how risk predictions, premiums, and demand in home insurance and two lines of auto insurance would respond to unrestricted multiline experience rating. Using claims data from a large sample of households, we first estimate the variance‐covariance matrix of unobserved heterogeneity in claim risk. We then show that conditioning on claims experience leads to material refinements of predicted claim rates. Last, we assess how households’ demand for coverage would respond to multiline experience rating. We find that the demand response would be large.

Suggested Citation

Barseghyan, Levon and Molinari, Francesca and Morris, Darcy Steeg and Teitelbaum, Joshua C., The Cost of Legal Restrictions on Experience Rating (March 2020). Journal of Empirical Legal Studies, Vol. 17, Issue 1, pp. 38-70, 2020, Available at SSRN: https://ssrn.com/abstract=3607378 or http://dx.doi.org/10.1111/jels.12242

Levon Barseghyan (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Francesca Molinari

Cornell University

Ithaca, NY 14853
United States

Darcy Steeg Morris

U.S. Census Bureau ( email )

4600 Silver Hill Road
D.C., WA 20233
United States

Joshua C. Teitelbaum

Georgetown University Law Center ( email )

600 New Jersey Avenue NW
Washington, DC 20001
United States
202-661-6589 (Phone)

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