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Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France

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  • Georges Dionne
  • Pierre-Carl Michaud
  • Maki Dahchour

Abstract

This paper uses longitudinal data to perform tests of asymmetric information in the French automobile insurance market for the 1995-1997 period. This market is characterized by the presence of a regulated experience-rating scheme (bonus-malus). We demonstrate that the result of the test depends crucially on how the dynamic process between insurance claims and contract choice is modelled. We apply a Granger causality test controlling for the unobservables. We find evidence of moral hazard which we distinguish from adverse selection using a multivariate dynamic panel data model. Experience rating appears to lead high risk policyholders to choose contracts that involve less coverage over time. These policyholders respond to contract changes by increasing their unobservable efforts to reduce claims.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0420.

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Date of creation: 2004
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Handle: RePEc:lvl:lacicr:0420

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Keywords: Automobile insurance; road safety; asymmetric information; experience rating; moral hazard; adverse selection; dynamic panel data models; Granger causality test;

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References

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Cited by:
  1. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Discussion Paper Series, Universitaet Augsburg, Institute for Economics 293, Universitaet Augsburg, Institute for Economics.
  2. Spindler, Martin & Winter, Joachim & Hagmayer, Steffen, 2012. "Asymmetric Information in the Market for Automobile Insurance: Evidence from Germany," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 12259, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  3. Yarmukhamedov, Sherzod, 2013. "Empirical analysis of moral hazard: a study of a vehicle insurance tax reform," Working papers in Transport Economics, CTS - Centre for Transport Studies Stockholm (KTH and VTI) 2013:14, CTS - Centre for Transport Studies Stockholm (KTH and VTI).

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