Description:
In automobile insurance, the “contract timing effect” under Bonus-Malus System - there are fewer and fewer claims as time approaches to the end of a contract year - would bias the test of moral hazard. While the Expected Utility model cannot explain this phenomenon, we aim to unravel it by a behavioral model, utilizing concepts of “reference point” and “mental accounting“ from Behavioral Economics. The key is that, our model takes claiming information all the way through both other periods within the same contract year and all future contract years, whereas Expected Utility models can only capture the later one