Identifying Moral Hazard in Car Insurance Contracts

Two Tests for Ex Ante Moral Hazard in a Market for Automobile Insurance

“…Table 3 reports that insurance increases the probability of an RTC from between 0.7 and 17.1 percent, depending on the econometric model one chooses. The midpoint of these estimates is similar to the 5.9 percentage point increase in probability of an RTC reported among French drivers in an earlier working paper by Dionne, Michaud, and Dahchour () but less than Weisburd () who attributes a 10 percentage point increase in automobile accidents to ex ante moral hazard.…”

“…Weisburd () conducts tests for ex ante moral hazard using an Israeli data set in which automobile insurance coverage was distributed as an employee benefit to 67 percent of motorists in the sample. She argues that the allocation of company coverage provides exogenous variation in insurance coverage that is independent of adverse selection.…”

On the road again: traffic fatalities and auto insurance minimums

“…Still, even this relatively small effect implies that increasing the average liability minimum by $6,000 would result in one extra traffic fatality, a questionable tradeoff given the average value of a statistical life of about $7 million. Our estimate is consistent with the recent findings showing significant improvements in traffic safety and social welfare from less generous insurance coverage (Jeziorski, Krasnokutskaya and Ceccariniz, 2015;Weisburd, 2015).…”

“…In their study, Dionne et al also claim to be able to separate moral hazard from adverse selection and learning, noting that policyholders with less driving experience have a combination of learning and moral hazard effects. Weisburd's (2015) instrumental variable analysis of Israeli employer-determined auto insurance data from the 2001-2008 period shows that a $100 reduction in accident costs for drivers results in a 1.7 percentage point increase in the probability of an accident or, equivalently, a 10 percent increase in auto accidents. Similarly, the Jeziorski, Krasnokutskaya and Ceccariniz (2015) analysis of data from a major Portuguese auto insurance company offers strong evidence of moral hazard.…”

“…For example, Jeziorski, Krasnokutskaya and Ceccariniz (2015) estimate that a $50 rise in the cost of a claim for an average policy reduces the claim probability by roughly a 0.1 percentage point. Similarly, Weisburd (2015) estimates that a $100 reduction in accident claim costs for drivers results in a 1.7 percentage point increase in the probability of an accident or, equivalently, a 10 percent increase in auto accidents. These findings show that significant social welfare costs can arise due to moral hazard from over-generous auto insurance coverage.…”