Bundled insurance coverage and asymmetric information: Claim patterns of automobile theft insurance in Taiwan

Abstract

In the presence of moral hazard, automobile theft insurance claims may be fabricated to compensate for losses incurred during traffic accidents. Using a unique national dataset, we compare the claim probabilities for automobile theft insurance among policyholders with bundled automobile insurance coverage (both automobile theft insurance and automobile physical damage insurance) and policyholders with only automobile theft coverage. We find that policyholders with only automobile theft coverage have a significantly higher claim probability than those with bundled coverage. In addition, we find that automobile theft insurance with (without) stolen parts endorsement is associated with higher claim probabilities for total and partial losses (only total losses). We further investigate the effects of car brands and show that Mazda, BMW, and Toyota are associated with significantly higher claim probabilities for both total and partial losses among policyholders with only automobile theft insurance. The results of this study point to a crucial policy implication for insurers. When determining the rating structure of discrimination premium setting, they should consider whether policyholders have bundled insurance policies or not, in addition to car brands.