University of Augsburg Lilia Filipova Discussion of: The Impact of Adjuster Moral Hazard on Driving Records ARIA August 6, 2007 Quebec City

2 Property damage schemes  Third-party recovery scheme – Alberta  time delay, higher costs of settling claims  First-party recovery scheme with collision coverage - Ontario  Covers both the not-at-fault and the at-fault portions of the loss  Moral hazard on behalf of the claims adjuster: -No need for settling a claim with a third-party -Assignment of fault has no effect on the compensation paid out -Assuming that driver is not at fault can reduce settlement costs  Adjuster Moral Hazard implies that claimants are less likely to be found at fault in first-party recovery scheme  Risk adjustment depends only on at-fault claims Some true high risk drivers are misclassified as low risk drivers

3 Incorrect assignment of fault  Implications  Lower efficiency of experience rating  Driving record classes fail to represent the true risk  More pooling  Moral hazard on behalf of drivers  Insurance premiums become higher for the entire portfolio  Anecdotal evidence  The rate of not-at-fault claims is higher with the first-party recovery scheme  With first-party recovery scheme the percentage of drivers in class 6 is larger

4 Theoretical Model  Purpose  To analyze the impact of the incorrect assignment of fault on the distribution of the insureds across the driving record classes (misclassification) and on the resulting premiums.  Simulation  distribution of insureds in driving record classes  probability of at-fault accident for each class  rate class differentials for the driving record classes  insurance premiums  Comparison between first-best model and model with adjuster moral hazard  Results – with adjuster moral hazard  The probability for a single insured to be in class 6 is higher  The proportion of insureds belonging to class 6 is higher  Less differentiation in the rate class differentials  Premiums are higher for almost all classes

5 Suggestions for further research  Stronger evidence on the existence of adjuster moral hazard in first-party recovery schemes  Measure the extent of adjuster moral hazard – the probability that the adjuster records someone who is at fault as not at fault  Are there other reasons for the difference in the distribution of drivers records?  Are there any differences in the fault determination rules in Ontario and Alberta?  Are there other reasons for the differences in the insurance premiums?  Is the average probability of accident the same for Ontario and Alberta?  Differences in product offerings and additional services?  Is the rate of reported claims different?