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Replacement Cost Endorsement and Opportunistic Fraud in Automobile Insurance

  • G. Dionne
  • R. Gagné

Traditional insurance contracts do not offer protection against the replacement value of a vehicle. A replacement cost endorsement gives the opportunity to get a new vehicle in the case of a total theft or in the case of total destruction of the car in a road accident. This type of protection was introduced in Canada in the late 1980's. It is also offered in France and many insurers in the United States are going to move in that direction. We propose tests that separate moral hazard from adverse selection in the analysis of the effect of this additional protection on car theft. We show that holders of car insurance policies with a replacement cost endorsement have a higher probability of theft near the end of this additional protection (usually 24 months following the acquisition of a new car). Our tests indicate that this result is a form of ex post moral hazard or opportunistic insurance fraud. Copyright 2002 by Kluwer Academic Publishers

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2000-06.

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Date of creation: 2000
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Handle: RePEc:ema:worpap:2000-06
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  1. Bond, E.W. & Crocker, K.J., 1993. "Hardball and the Soft Touch: The Economics of Optimal Insurance Contracts with Costly State Verification and Endogenous Monitoring Costs," Papers 10-93-1b, Pennsylvania State - Department of Economics.
  2. Devlin, R.A., 1988. "Liability Versus No-Fault Automobile Insurance Regimes: An Analysis Of The Experience In Quebec," Working Papers 88126, Wilfrid Laurier University, Department of Economics.
  3. Fortin, B. & Lanoie, P., 1998. "Effects of Workers' Compensation : A Survey," Papers 9816, Laval - Recherche en Politique Economique.
  4. P. Picard, 1998. "Insurance fraud : theory," THEMA Working Papers 98-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. Dionne, G. & Gourieroux, C. & Vanasse, C., 1998. "The Informational Content of Household Decisions with Applications to Insurance under Adverse Selection," Papers 9806, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
  6. G. Dionne, 1998. "La mesure empirique des problèmes d'information," THEMA Working Papers 98-33, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  7. Marcel Boyer & Georges Dionne, 1987. "Description and Analysis of the Quebec Automobile Insurance Plan," Canadian Public Policy, University of Toronto Press, vol. 13(2), pages 181-195, June.
  8. 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.
  9. L. Caron & G. Dionne, 1997. "Insurance fraud estimation : more evidence from the Quebec automobile insurance industry," THEMA Working Papers 97-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  10. Fortin, Bernard & Lanoie, Paul, 1992. "Substitution between unemployment insurance and workers' compensation : An analysis applied to the risk of workplace accidents," Journal of Public Economics, Elsevier, vol. 49(3), pages 287-312, December.
  11. Boyer, M Martin, 2000. " Insurance Taxation and Insurance Fraud," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 101-34.
  12. P. Picard, 1996. "On the Design of Optimal Insurance Policies under Manipulation of Audit Cost," THEMA Working Papers 96-20, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  13. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
  14. Dionne, Georges & St-Michel, Pierre, 1991. "Workers' Compensation and Moral Hazard," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 236-44, May.
  15. Auriol, Emmanuelle & Picard, Pierre M., 1999. "Optimal Industrial Policy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  16. Cummins, J David & Tennyson, Sharon, 1996. "Moral Hazard in Insurance Claiming: Evidence from Automobile Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(1), pages 29-50, January.
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