Essays on Accident Forgiveness in Automobile Insurance

Accident forgiveness, often considered as a type of premium insurance, protects the insured against a premium increase if an at-fault accident occurs. Although accident forgiveness has received considerable attention in the auto insurance industry, there is little or no literature on accident forgiveness in the actual contract. In this dissertation, I use dynamic modeling to examine optimal insurance contracts with an accident forgiveness option and further use a structural modeling approach to investigate the impacts of risk and time preferences on the accident forgiveness contract purchase. This study attempts to improve our understanding of the implications of this new type of insurance option. The first essay develops an asymmetric learning model in which insurers compete to attract policyholders. When information about previous at-fault accidents is not shared perfectly by insurers in the market, information asymmetries arise between the initial insurer and the rival insurer, as well as between the insured and the insurer. I design an auto insurance contract with accident forgiveness that charges policyholders higher-than-market premiums according to their risk types in the first period and then experience-rates both types in the second period contingent on their previous at-fault accidents. Contrary to the prior literature, which elicits competition as the reason to temper the effects of experience rating, this model is built such that accident forgiveness is the device to temper experience rating. This contract attracts policyholders since it forgives at-fault accidents and provides rewards in terms of coverage and premiums for those who remain accident-free. Risk and time preferences influence a variety of economic behaviors. In the field of insurance economics, attitudes toward risk and time are likely to affect the insurance purchase decision. As can be observed in the auto insurance market, when offered an optional accident forgiveness policy from insurers, the insured shows different purchase patterns, regardless of driving behavior. The question of whether and how individual risk aversion and discount rates affect the accident forgiveness purchase decision is critical to understanding contract design. In the second essay, by conducting a unique experiment under controlled laboratory conditions, I examine the role of risk and time preferences in accident forgiveness contract purchase and determine that individual discount rates and product prices are significant factors. Interestingly, I also find evidence that less risk-averse policyholders generally behave more like risk-neutral agents when making insurance decisions. Risk attitudes affect insurance decision-making only among those with a relatively high degree of risk aversion

Temporary Layoffs and Unemployment Insurance: Is Experience Rating Desirable?

This paper explores how the introduction of an experience rated system of unemployment insurance affects employment and welfare in a model where implicit contracts between firms and workers give rise to wage rigidities and unemployment. In the literature, it has been argued that experience rated systems of unemployment insurance may reduce long term employment as firms anticipate the higher costs of layoffs implied by experience rating. Our analysis shows that, despite the higher costs of layoffs, the introduction of experience rating may increase long term employment. Moreover, it unambiguously increases welfare.unemployment insurance, labour markets, implicit contracts

Asymmetric information, self-selection and pricing of insurance contracts: the simple no-claims case

This paper presents an optional bonus-malus contract based on a pri-ori risk classification of the underlying insurance contract. By inducing self-selection, the purchase of the bonus-malus contract can be used as a screening device. This gives an even better pricing performance than both an experience rating scheme and a classical no-claims bonus system. An application to the Danish automobile insurance market is considered

Separating Moral Hazard from Adverse Selection and Learning in Automobile Insurance: Longitudinal Evidence from France

The identification of information problems in different markets is a challenging issue in the economic literature. In this paper, we study the identification of moral hazard from adverse selection and learning within the context of a multi-period dynamic model. We extend the model of Abbring et al. (2003) to include learning and insurance coverage choice over time. We derive testable empirical implications for panel data. We then perform tests using longitudinal data from France during the period 1995-1997. We find evidence of moral hazard among a sub-group of policyholders with less driving experience (less than 15 years). Policyholders with less than 5 years of experience have a combination of learning and moral hazard, whereas no residual information problem is found for policyholders with more than 15 years of experience.Moral hazard, adverse selection, learning, dynamic insurance contracting, panel data, empirical test

Risk Classification in Insurance Contracting

Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, compute the corresponding premiums, and thereby reduce asymmetric information. An efficient risk classification system generates premiums that fully reflect the expected cost associated with each class of risk characteristics. This is known as financial equity. In the health sector, risk classification is also subject to concerns about social equity and potential discrimination. We present different theoretical frameworks that illustrate the potential trade-off between efficient insurance provision and social equity. We also review empirical studies on risk classification and residual asymmetric information.Adverse selection, classification risk, diagnostic test, empirical test of asymmetric information, financial equity, genetic test, health insurance, insurance rating, insurance pricing, moral hazard, risk classification, risk characteristic, risk pooling, risk separation, social equity

Worker Absenteeism in Search Equilibrium

The paper presents a tractable general equilibrium model of search unemployment that incorporates absence from work as a distinct labor force state. Absenteeism is driven by random shocks to the value of leisure that are private information to the workers. Firms offer wages, and possibly sick pay, so as to maximize expected profits, recognizing that the compensation package affects the queue of job applicants and possibly the absence rate as well. Shocks to the value of leisure among nonemployed individuals interact with their search decisions and trigger movements into and out of the labor force. The analysis provides a number of results concerning the impact of social insurance benefits and other determinants of workers’ and firms’ behavior. For example, higher nonemployment benefits are shown to increase absenteeism among employed workers. The normative anlysis identifies externalities associated with firm-provided sick pay and examines the welfare implications of alternative policies. Conditions are given under which welfare equivalence holds between publicly provided and firm-provided sick pay. Benefit differentiation across states of non-work are found to be associated with non-trivial welfare gains.absenteeism, search, unemployment, social insurance

Unemployment Insurance in Theory and Practice

A hallmark of modern labor economics is the close interplay between the development of theory, data sources and econometric testing. The evolution of the economic analysis of unemployment insurance provides a good illustration. New theoretical approaches, in particular job-search theory, have inspired a large amount of empirical research, some of it methodologically innovative and most of it highly relevant for economic policy. The paper presents a broad survey and an assessment of the economic analysis of unemployment insurance as it has evolved since the 1970s.

Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France

This paper uses longitudinal data to perform tests of asymmetric information in the French automobile insurance market for the 1995-1997 period. This market is characterized by the presence of a regulated experience-rating scheme (bonus-malus). We demonstrate that the result of the test depends crucially on how the dynamic process between insurance claims and contract choice is modelled. We apply a Granger causality test controlling for the unobservables. We find evidence of moral hazard which we distinguish from adverse selection using a multivariate dynamic panel data model. Experience rating appears to lead high risk policyholders to choose contracts that involve less coverage over time. These policyholders respond to contract changes by increasing their unobservable efforts to reduce claims.Automobile insurance, road safety, asymmetric information, experience rating, moral hazard, adverse selection, dynamic panel data models, Granger causality test

Experience Rating: Insurance Versus Efficiency

When unemployment insurance is publicly provided, firms' layoff decisions can be distorted. Unemployment insurance reduces the cost of laying off workers, thereby encouraging layoffs and leading to more unemployment. To dampen this increase in unemployment, it has been suggested that unemployment insurance should be financed with an experience rated tax. This paper examines the possibility that, despite that increasing the level of experience rating can reduce the level of unemployment, it can also reduce the wealth of unemployed workers. The reason for this is that, under high levels of experience rating, firms may reduce their severance payments by more than the publicly provided unemployment insurance benefit. We build a model where competitive firms offer long-term contracts to risk-adverse workers. Asymmetric information about workers' productivity leads to over-unemployment and incomplete private insurance against unemployment. This paper shows that an experience rated unemployment insurance program cannot increase the wealth of unemployed workers without increasing unemployment.Unemployment Insurance; Experience Rating; Layoffs

Flexicurity in Belgium: A Proposal Based on Economic Principles

The current unemployment insurance and employment protection legislation were set up in an economic environment in which relationships between workers and firms were typically long-lasting and stable. The increasing globalisation of the economy and the rapid technological and organisational changes require more flexibility of both workers and firms leading to career paths which are much more volatile both within and between firms. Current institutions must be therefore urgently reformed to reconcile this new need of more flexibility with that of security for workers. The call for “flexicurity” is not new, but there is no unanimity on the corresponding institutional model it implies. Rather than proposing a reform on the basis of existing institutions abroad, we propose a reform that is explicitly guided by economic principles. In a nutshell, we propose to transform the bulk of the advance notice payments by a unique lay-off contribution, independently of the type of worker (blue or white-collar) and type of contract (temporary or open-ended). A severance payment, less important than the lay-off contribution, is due to cover the psychic cost related to dismissal. In order to make the employer accountable for the costs he imposes on society, the lay-off contribution should be made proportional to the cumulative past earnings since the moment that the worker was hired in the firm. This contribution would be used not only to finance a supplement to the current unemployment benefits, but also, as to make the worker more accountable, to finance active labour market policies for the unemployed. Aside of this scheme, it makes sense to generalise the current scheme of temporary unemployment benefits for blue-collar workers to white-collar workers, but only to the extent that one introduces experience rating in the funding, so that again the employers are made accountable for the social costs that they induce by these temporary lay-offs.lexicurity, employment protection, unemployment insurance, active labour market policies, optimal design