The Incentive Effect in the Comprehensive Automobile Insurance of Taiwan

Abstract

Using the data of switching contracts through years in comprehensive automobile insurance of Taiwan, Li, Liu, & Yeh (2006) successfully isolate the adverse selection problem and find deductible in insurance contract provide incentives on moral hazard. This paper follows their methodology to test the same problem in the same market from the view point of insurance contracts with different coverage items. This paper finds that incentive effect exists when policyholders switch their policies from contracts type A or B into contract type C. It implies that high coverage contracts may cause careless driving. But this paper can not confirm the incentive effect when the policyholders switch their policies from contract type A into contract type B. When the unknown reason claims are cut out, there is no evidence of incentive effect, but when the unknown reason claims are included, the evidence existed. But we can not make sure that is the truly evidence of incentive effect, or that is only from more coverage items including more claims. We also found the evidence to support that insurance companies tighten auditing criteria when the claim amount rises. All outcomes in the paper are generally held despite different deductible designs.