1. Claim Service, Price Dispersion, and Contract Renewal in the Automobile Insurance Market
Chu-Shiu Li
National Kaohsiung First University of Science and Technology, Taiwan
Chwen-Chi Liu, Sheng-Chang Peng
Feng Chia University, Taiwan

2. Background(1/3) Claim Service (policyholders’ view)
-- fundamental element that attract customers in insurance industry where repeated contracts are common.
-- by learning about the service received, the insured may renew an insurance policy with claim experience.
-- the learning experience from claim service is a slow process as it exists only when an accident event occurs (Israel, 2005).
-- customers may switch insurers based on price dispersion which may entail a search cost among different insurers (Schlesinger and von der Schulenburg, 1993).

3. Background(2/3) Contract Renewing (insurers’ view)
-- a insurers usually receive higher profits from the policies with a longer tenure duration.
(D’Arcy and Doherty, 1990; Cohen, 2012; Kofman and Nini, 2012).
-- insurers have more information about risk for current policyholders than potential policyholders. Therefore the problem of risk asymmetry of a renewed policy might be mitigated.
-- the cost of persuading a current policyholder to renew a contract is lower than that of selling a contract to a new customer, as the initial cost of finding potential customers is very high.

4. Background(3/3) Price dispersion
-- Most of the previous literature analyze price dispersion separately. They analyze price dispersion in terms of theoretical models and grouped data.
(Berger, Kleindorfer, and Kunreuther, 1989; Dahlby and West,1986)
-- An exception study investigates the effect of consumer information, including both insurance quality and price, on switching insurers based on survey data.
(Schlesinger and von der Schulenburg, 1993)

5. Motivation
A good understanding of the determinants of contract renewal, such as service quality and price dispersion, is crucial for insurers.
Due to data limitation, no studies provide real evidence to verify the switching behavior.
Based on a unique panel data set with detailed information of individual insurance policies, this study is able to examine the switching behavior of policyholders in the automobile insurance market of Taiwan.

6. Testing hypotheses-1
Hypothesis H1: Compared to those policies without claims, policyholders who have claim experience would be more likely to repurchase the contracts in the next year due to a learning effect.
Hypothesis H2: Due to a price effect, the higher the policy premium, the lower the repurchase probability by all policyholders.

7. Testing hypotheses-2
Hypothesis H3: Given policyholders with claim experience that renewed, the longer the claim delay or the less the claim payment from the insurers, the higher the probability of switching insurers by an insured.
Hypothesis H4: Given the same type of renewed policy, the probability of switching insurers is positively correlated with the amount of premium reduction received in the next period, regardless of claim experience.

8. Data
A panel data set of Taiwanese private automobile physical damage insurance, including: the comprehensive coverage policy and the moving collision coverage policy, from 2005 to 2008
Policy information: demographics of the policyholder (age, gender, and marital status), characteristics of the vehicle (car age, car brand, and exhaust), and other insured information (premium, claim coefficient, deductible type, insurer, and insured region)
Claim information: demographics of the claimed driver, deal date, claim date, and claim payment

9. Descriptive statistics
Policy type
Comprehensive coverage
Moving collision coverage
Variable
Mean
Std Dev
Total policies
Renew
0.53
0.50
0.58
0.49
Claim
0.51
0.09
0.29
Policyholder age
42.82
9.84
41.90
10.09
Female policyholder
0.74
0.44
0.66
0.47
Married policyholder
0.89
0.31
0.86
0.34
Premium (NTD 1,000)
26.71
11.26
10.16
5.41
Deductible
0.15
0.36
0.00
Claim coefficient
-0.11
0.20
-0.19
0.24
Car age
1.31
1.90
2.43
2.40 N
692,365
635,089
Renewed policies
Switch
0.23
0.42
0.17
0.37
370,251
371,406
Claimed policies
Claim payment (NTD 1,000)
23.48
31.51
26.09
46.04
Deal days
31.23
31.91
47.14
47.73
352,390
59,863

10. Descriptive statistics of renewed policies-1
Mean
Difference
Variable
All
No switch
Switch
No switch vs. Switch
Panel A: Comprehensive coverage
Renewed policies
Claim
0.49
0.48
0.52
<.0001
(0.50)
Premium (NTD 1,000)
26.16
25.67
27.83
(11.77)
(12.03)
(10.67) N
370,251
286,308
83,943
Renewed and Claimed policies
Claim payment (NTD 1,000)
24.91
25.11
24.28
(33.00)
(32.56)
(34.31)
Deal days
31.06
30.57
32.58
(32.03)
(31.77)
(32.80)
180,658
136,654
44,004

11. Descriptive statistics of renewed policies-2
Mean
Difference
Variable
All
No switch
Switch
No switch vs. Switch
Panel B: Moving collision coverage
Renewed policies
Claim
0.10
0.09
<.0001
(0.29)
(0.30)
Premium (NTD 1,000)
9.34
9.05
10.80
(5.26)
(5.17)
(5.46) N
371,406
309,344
62,062
Renewed and Claimed policies
Claim payment (NTD 1,000)
26.93
26.35
29.60
(45.00)
(42.95)
(53.29)
Deal days
46.72
46.24
48.93
(48.22)
(48.62)
(46.30)
35,591
29,199
6,392

12. The patterns of Deal days and Switch by insurer

13. Correlation between Deal days and Switch
Pearson Correlation
Spearman Rank-Order Correlation
Comprehensive coverage
0.4568
0.4778
(0.0024)
(0.0014)
Moving collision coverage
0.1688
0.1552
(0.2916)
(0.3325)

14. Testing Results: Hypothesis H1 & H2
Dependent variable: repurchase (=1) or not
Policy type
Comprehensive coverage
Moving collision coverage
Variable
Model 4-1
Model 4-2
Model 4-3
Model 4-4
Claim_hat
0.2018
***
0.2063
(0.0503)
(0.1216)
(0.1219)
Log(Premium)
(0.0070)
(0.0059)
Hausman test(χ2)
28.17
28.83
51.43
87.98
Log Likelihood
Observations
692,365
635,089
Repurchase ?
Claim ?
H1 (＋) comprehensive
Premium
H2 (－)
H1 (－) moving collision

15. Testing Results: Hypothesis H3_1
Dependent variable: switch (=1) or not
Policy type
Comprehensive coverage
Moving collision coverage
Variable
Model 5-1
Model 5-2
Claim
0.0463
***
(0.0053)
Claim_hat
1.2294
(0.1541)
Hausman test(χ2)
1.99
61.60
Log Likelihood
Observations
370,251
371,406
Switch ?
Claim ?
H3 (＋)

16. Testing Results: Hypothesis H3_2
Dependent variable: switch (=1) or not
Claim service quality
Switch ?
Claim delay
H3 (＋)
Claim payment
H3 (－)
(Comprehensive only)

17. Premium differences No claim Claim No switch Switch p-value
Comprehensive coverage
Premium t
23.73
27.03
<.0001
27.74
28.39
(12.53)
(11.80)
(11.88)
(10.69)
Premium t+1
19.90
22.71
26.34
26.10
0.0019
(10.50)
(10.38)
(12.03)
(10.92)
Premium difference
3.83
4.32
1.40
2.29
=Premiumt－Premiumt+1
(5.66)
(8.44)
(6.79)
(8.09) N
128,277
26,520
99,961
25,779
Moving collision coverage
8.84
10.59
10.52
11.99
(5.09)
(5.35)
(5.33)
(5.48)
6.89
8.16
10.14
11.09
(3.86)
(4.12)
(4.93)
(4.88)
1.96
2.43
0.38
0.90
(2.50)
(3.30)
(3.24)
(3.88)
275,749
51,009
28,117
5,698

18. Testing Results: Hypothesis H4
Dependent variable: switch (=1) or not
Policy type
Comprehensive coverage
Moving collision coverage
Variable
Model 8-3
Model 8-4
Model 8-7
Model 8-8
Log(Deal days)
0.0386
***
0.0606
(0.0062)
(0.0124)
Log(Claim payment)
(0.0081)
(0.0095)
Premium difference
0.0030
0.0031
0.0078
0.0081
(0.0006)
(0.0026)
Log Likelihood
Observations used
125,740
33,815
Switch ?
Premium difference
H4 (＋)
Price dispersion

19. Findings Summary Switch ? Claim ? H3 (＋) Repurchase ? Claim ?
H1 (＋) Comprehensive
Premium
H1 (－) Moving-
Switch ?
Premium difference
H4 (＋)
H2 (－)
Claim service quality
Switch ?
Claim delay
H3 (＋)
Claim payment
H3 (－)
(Comprehensive only)
Price dispersion

20. Discussion_1
Learning information in the insurance industry goes two ways: insurers may not know the risk type of the insured, and the insured may not have information about the service quality of the insurers.
Extensive literature provides empirical findings on asymmetric information from the view of insurers by focusing on the coverage-risk problem of the insured.
However, very few studies analyze the information problem and service quality of the insurance companies.
This paper fills this gap by examining the quality-switching relationship from the view of the insured.

21. Discussion_2
Most of the previous studies, such as those by Cohen (2005, 2012), Israel (2005), and Kofman and Nini (2012), use automobile insurance data from a single company.
Our findings are based on realized claim data and policies from the entire automobile insurance industry.
This unique dataset enable us to observe the claim services of different companies and to compare the retention rates with the services among insurers.

22. Discussion_3
Contrary to a previous study in which it was found claim delay had no role in the switching of insurers (Schlesinger and von der Schulenburg, 1993), we discover out that claim days, the key indicator of insurance service, has a significant effect on policy switching.
The role of claim service is identified after price differences and claim payments are controlled.

23. Discussion_4
We provide direct evidence to show that competitive insurance premiums do affect the attracting of policyholders from rival insurers.
Additionally, the empirical results are complemented with previous theoretical models of price dispersion in the insurance market.

24. Thank You !!