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The Impact of Adjuster Moral Hazard on Driving Records

Author

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  • Mary Kelly
  • Sapna Isotupa
  • Anne Kleffner

Abstract

In a first-party recovery scheme for automobile property damage, the first-party insurer compensates not-at-fault vehicular damage. In this scheme, adjusters may not have the incentive to assign liability when the driver is, in fact, at fault for the accident. This is due to adjusters not having to coordinate with a third-party adjuster, and, for insureds that carry collision coverage, the assignment of fault does not appreciably affect the compensation paid out. This in turn reduces the effectiveness of the experience-rating component of the insurance premium. Empirical evidence that supports the presence of incorrect fault assignment is provided. A stochastic model of experience rating analyzing the impact of incorrect fault assignment on driving record classes confirms that low-risk insureds pay more for insurance than if fault was correctly assigned.

Suggested Citation

  • Mary Kelly & Sapna Isotupa & Anne Kleffner, 2009. "The Impact of Adjuster Moral Hazard on Driving Records," North American Actuarial Journal, Taylor & Francis Journals, vol. 13(4), pages 425-437.
    • Handle: RePEc:taf:uaajxx:v:13:y:2009:i:4:p:425-437
    DOI: 10.1080/10920277.2009.10597567
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