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Deductible Contracts Against Fraudulent Claims: Evidence From Automobile Insurance

Listed author(s):
  • Georges Dionne
  • Robert Gagné

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 Technology

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/00346530151143824
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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. G. Dionne & R. Gagné, 1997. "The non-optimality of deductible contracts against fraudulent claims : an empirical evidence in automobile insurance," THEMA Working Papers 97-23, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
  3. Bond, Eric W. & Crocker, Keith J., 1997. "Hardball and the soft touch: The economics of optimal insurance contracts with costly state verification and endogenous monitoring costs," Journal of Public Economics, Elsevier, vol. 63(2), pages 239-264, January.
  4. G. Dionne & D. Gouriéroux & C. Vanasse, 1998. "The informational content of household decisions with applications to insurance under adverse selection," THEMA Working Papers 98-06, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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  7. Caron, L. & Dionne, G., 1996. "Insurance Fraud Estimation: More Evidence from the Quebec Automobile Insurance Industry," Ecole des Hautes Etudes Commerciales de Montreal- 96-02, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
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  15. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
  16. Butler, Richard J & Durbin, David L & Helvacian, Nurhan M, 1996. "Increasing Claims for Soft Tissue Injuries in Workers' Compensation: Cost Shifting and Moral Hazard," Journal of Risk and Uncertainty, Springer, vol. 13(1), pages 73-87, July.
  17. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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