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Deductible Contracts Against Fraudulent Claims: Evidence From Automobile Insurance

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Author Info
Georges Dionne
Robert Gagné

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Abstract

Insurance fraud is now recognized as a significant resourceallocation problem in many markets. The object of this study is to verify how straight deductible contracts may affect the equilibrium level of falsification in automobile insurance. This type of contract is observed in many markets, even if it is not optimal under costly state falsification. A higher deductible may create incentives to fraud or cheat, particularly when the insured anticipates that the claim has a small probability of being audited. To verify this proposition, we estimate a loss equation for which one of the determinants is the amount of the deductible, using a data set of claims filed for damages following an automobile accident with twenty insurance companies in Quebec in 1992. Because we have access only to reported losses, a higher deductible also implies a lower probability of reporting small losses. To isolate the fraud effect related to the presence of a deductible in the contract, we jointly estimate a loss equation and a threshold equation. The threshold is the amount over which an insured decides to report a given loss. It can be interpreted as a personal deductible, and it is not observable. Our results indicate, among other things, that with an appropriate correction for selectivity the amount of the deductible is a significant determinant of the reported loss, at least when no other vehicle is involved in the accident; in other words, when the presence of witnesses is less likely. © 2001 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

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Publisher Info
Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 83 (2001)
Issue (Month): 2 (May)
Pages: 290-301
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Handle: RePEc:tpr:restat:v:83:y:2001:i:2:p:290-301

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  1. Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers bgse17_2008, University of Bonn, Germany. [Downloadable!]
  2. Dionne, Georges & Giuliano, Florence & Picard, Pierre, 2009. "Optimal auditing with scoring: theory and application to insurance fraud," MPRA Paper 18374, University Library of Munich, Germany. [Downloadable!]
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  3. Chiappori, Pierre Andre & Salanie, Bernard, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  4. Anthony Miyazaki, 2009. "Perceived Ethicality of Insurance Claim Fraud: Do Higher Deductibles Lead to Lower Ethical Standards?," Journal of Business Ethics, Springer, vol. 87(4), pages 589-598, July. [Downloadable!] (restricted)
  5. Georges Dionne & Florence Giuliano & Pierre Picard, 2003. "Optimal Auditing for Insurance Fraud," Cahiers de recherche 0329, CIRPEE. [Downloadable!]
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