The Impact of Introducing Co-insurance into an Insurance Policy on Moral Hazard: An Incentivised Experiment

Purpose: The aim of the paper is to determine the impact of entries into the insurance policy that result in the insured person bearing some costs in the event of a loss on the level of effort put into measures to reduce the risk of material loss. Design/methodology/approach: The hypothesis that the effort put into avoiding the loss increases as the own contribution expressed as a percentage of the damage increases was verified through an incentivised experiment conducted among large number of students. Findings: Most of the differences that were found in the research were between two groups: willing and not willing to buy the insurance and those who have bought and haven't bought the insurance policy. No statistically significant differences were found between groups with different level of co-insurance. The existence of ex ante moral hazard was confirmed-the insured tried less hard to avoid loss than the uninsured. It was only partially reflected in the amount of losses. Uninsured lost less than insured, but the difference was not significant. Practical Implications: Results of the conducted experiments bring important information about people’s perception of insurance policies that can be useful for insurance companies. Firstly, it seems that even educated individuals are often not able to understand policy conditions and insurance companies should intensify efforts to help clients to comprehend them. Secondly, it seems that the level of coverage is not crucial in determinig individuals’ behaviour, which gives some leeway to insurance companies. Originality/Value: A definite novelty compared to other studies is the use of effort put into avoiding loss as an ex ante moral hazard measure. An additional advantage of the research is its experimental nature, which allows the conditions of ceteris paribus to be maintained.