The Life Value of Financial Contracting: Evidence from the Insurance Market

35 Pages Posted: 12 Jan 2021 Last revised: 10 Mar 2021

See all articles by Yinglu Deng

Yinglu Deng

Tsinghua University - School of Economics & Management

Yuanqi Li

Peking University - Guanghua School of Management, Department of Finance

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Wensi Xie

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: January 12, 2021

Abstract

We investigate whether financial contract terms alter individuals’ risk-taking behavior under a moral hazard framework. Exploiting (a) the contractual-level data of automobile insurance, and (b) a unique institutional reform that gives more pricing freedom to insurers, we discover a significant decline in the likelihood of accidents (and those involving injuries or deaths) after the premium becomes more sensitive to past performance. The effects are stronger for riskier drivers, and in regions with a more dangerous road condition. The evidence suggests that contracts with a more flexible premium scheme of rewards and penalties induce less risky behavior, mitigating moral hazard.

Keywords: Financial Contract, Insurance, Moral Hazard, Risk-Taking Behavior

JEL Classification: G22, R41, G23, G28

Suggested Citation

Deng, Yinglu and Li, Yuanqi and Lin, Chen and Xie, Wensi, The Life Value of Financial Contracting: Evidence from the Insurance Market (January 12, 2021). Available at SSRN: https://ssrn.com/abstract=3764861 or http://dx.doi.org/10.2139/ssrn.3764861

Yinglu Deng

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Yuanqi Li

Peking University - Guanghua School of Management, Department of Finance ( email )

Beijing, Beijing 100871
China

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Wensi Xie (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

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