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On Compulsory Per-Claim Deductibles in Automobile Insurance

Author

Listed:
  • Chu-Shiu Li

    (Department of Economics, Feng Chia University, Taiwan, ROC, e-mail: csli@fcu.edu.tw)

  • Chwen-Chi Liu

    (Department of Insurance, Feng Chia University, Taiwan, ROC)

Abstract

The purposes of this paper are to analyze the theoretical characteristics of the compulsory deductible system and to verify the rationality of an increasing per-claim deductible in automobile insurance. We derive the optimal variable per-claim deductible by assuming the insurers are financially balanced and the expected utility of the insured is maximized in the absence of moral hazard. Our result suggests that a variable per-claim deductible increasing with the number of claims per year is not optimal. Instead, deductibles should be charged in a decreasing rate forming a second-best solution. The Geneva Papers on Risk and Insurance Theory (2003) 28, 25–32. doi:10.1023/A:1022191714312

Suggested Citation

  • Chu-Shiu Li & Chwen-Chi Liu, 2003. "On Compulsory Per-Claim Deductibles in Automobile Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 25-32, June.
    • Handle: RePEc:pal:genrir:v:28:y:2003:i:1:p:25-32
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    Cited by:

    1. Ching-Ping Wang & David Shyu & Hung-Hsi Huang, 2005. "Optimal Insurance Design Under a Value-at-Risk Framework," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(2), pages 161-179, December.

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