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Automobile Insurance Contracts and Risk of Accident: An Empirical Test Using French Individual Data

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  • Didier Richaudeau

    ([1] Laboratoire de Microéconomie Appliquée (LAMIA), Université Paris I Panthéon-Sorbonne, Département d'Evaluation et de Recherche en Accidentologie, INRETS [2] Laboratoire de Finance-Assurance, Centre de Recherche en Economie et Statistique Timbre, J320-15 boulevard Gabriel Péri 92245 Malakoff Cedex France)

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    Abstract

    Insurance has for a long time been perceived as a way of transferring responsibility from insured agents to insurers and thus as potentially influencing insured agents' behavior. Two particular opportunistic behaviors have been analyzed. First, the theory of adverse selection predicts that high-risk agents are likely to demand more insurance than are low-risk agents. Second, the theory of moral hazard predicts that the wider the insurance coverage, the less agents will try to prevent accidents. Both theories thus conclude that agents who are totally insured should have a higher probability of accident than those with only partial insurance, ceteris paribus. Nevertheless, one of the aims of insurance rating systems is to control for these opportunistic behaviors. In this article, we use individual data to see if the French automobile insurance rating system has achieved this aim. We do this using a two-step maximum-likelihood method. First, we compute a probit model to estimate the probability of taking out comprehensive versus third-party insurance. We then calculate the generalized residual, which is included as an independent variable in a negative binomial model estimating the probability of having an accident. The coefficient of this variable is argued to represent adverse selection and ex-ante moral-hazard behavior. The Geneva Papers on Risk and Insurance Theory (1999) 24, 97–114. doi:10.1023/A:1008737416839

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

    Volume (Year): 24 (1999)
    Issue (Month): 1 (June)
    Pages: 97-114

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    Handle: RePEc:pal:genrir:v:24:y:1999:i:1:p:97-114

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    Cited by:
    1. Jose Antonio Ordaz & Maria del Carmen Melgar & M. Kazim Khan, 2010. "Use and Extension of Count Data Models in the Determination of Relevant Factors for Claims in the Automobile Insurance Sector," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 119-138.
    2. Georges Dionne & Pierre-Carl Michaud & Maki Dahchour, 2004. "Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France," Cahiers de recherche 0420, CIRPEE.
    3. Pierre André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series 738, CESifo Group Munich.
    4. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
    5. Spindler, Martin & Winter, Joachim & Hagmayer, Steffen, 2012. "Asymmetric Information in the Market for Automobile Insurance: Evidence from Germany," MEA discussion paper series 12259, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    6. Dionne, Georges & Michaud, Pierre-Carl & Pinquet, Jean, 2013. "A review of recent theoretical and empirical analyses of asymmetric information in road safety and automobile insurance," Research in Transportation Economics, Elsevier, vol. 43(1), pages 85-97.
    7. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
    8. GÓMEZ GARCÍA, J.Mª & PELÁEZ FERMOSO, F.J. & y GARCÍA GONZÁLEZ, A., 2005. "Repercusiones del envejecimiento demográfico sobre el sistema público de pensiones en Castilla y León," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 23, pages 235-253, Abril.
    9. G. Dionne, 2001. "Commitment and Automobile Insurance in France, Quebec and Japan," THEMA Working Papers 2001-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    10. Shi, Peng & Valdez, Emiliano A., 2011. "A copula approach to test asymmetric information with applications to predictive modeling," Insurance: Mathematics and Economics, Elsevier, vol. 49(2), pages 226-239, September.

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