Risk Aversion, Negotiation, and Claims Settlement Strategies

37 Pages Posted: 9 Apr 2005

See all articles by Helen I. Doerpinghaus

Helen I. Doerpinghaus

University of South Carolina - Darla Moore School of Business

Jia-Hsing Yeh

The Chinese University of Hong Kong (CUHK) - Department of Finance

Joan T. Schmit

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance

Date Written: September 2004

Abstract

We examine the optimal claims settlement strategy for a liability insurer negotiating with classes of claimants who differ in risk attitude and negotiating skill. Our model demonstrates that a profit-maximizing insurer will be systematically less generous in claims payment to claimants who are more risk averse and who experience greater negotiating costs. We test our theory empirically using the 1997 Insurance Research Council automobile claims data. Following the existing literature we use claimant gender and age to identify classes of claimants with different risk preferences and negotiating costs. Empirical analysis is consistent with systematically less generous claims payment to claimants in these classes.

Keywords: risk aversion, negotiation, automobile insurance, claim settlement

JEL Classification: J14, J16

Suggested Citation

Doerpinghaus, Helen I. and Yeh, Jia Hsing Jason and Schmit, Joan T., Risk Aversion, Negotiation, and Claims Settlement Strategies (September 2004). Available at SSRN: https://ssrn.com/abstract=690121 or http://dx.doi.org/10.2139/ssrn.690121

Helen I. Doerpinghaus

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Jia Hsing Jason Yeh

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Joan T. Schmit (Contact Author)

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance ( email )

Madison, WI
United States
608-262-4240 (Phone)

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