Switching motivation and moral hazard: evidence from automobile physical damage insurance in Taiwan

This study investigates policyholders’ moral hazard from the perspective of switching motivation and determines whether switching behaviour is associated with the expiration effect in Taiwan’s automobile physical damage insurance market. Empirical results show that policyholders who switch to a new insurer early before their prior policy expires are more likely to file a claim in the last policy month—known as the expiration effect—than those who switch upon expiration of their policy and those who renew their contract with the same insurer. The expiration effect for the dealer-owned agent channel is more serious than for the direct underwriting channel. For the direct underwriting channel, the expiration effect for early switchers is more apparent than for normal switchers or renewers. The findings suggest that insurers should pay attention to switching policyholders to mitigate potential opportunistic behaviour by which policyholders switch to other insurers early before their policy expires and then file a claim to evade a surcharge for claims records.