On Compulsory Per-Claim Deductibles in Automobile Insurance |
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Authors: | Chu-Shiu Li and Chwen-Chi Liu |
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Institution: | (1) Department of Economics, Feng Chia University, Taiwan, ROC |
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Abstract: | The purposes of this paper are to analyze the theoretical characteristics of the compulsory deductible system and to verify the rationality of an increasing per-claim deductible in automobile insurance. We derive the optimal variable per-claim deductible by assuming the insurers are financially balanced and the expected utility of the insured is maximized in the absence of moral hazard. Our result suggests that a variable per-claim deductible increasing with the number of claims per year is not optimal. Instead, deductibles should be charged in a decreasing rate forming a second-best solution. |
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Keywords: | automobile insurance deductible per-claim second-best |
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