Description:
Moral hazard is a critical issue in automobile insurance claiming behavior. However, empirical studies show that the "contract timing effect" - there are fewer and fewer claims as the time approaches to the end of each contract year - would bias the test of moral hazard under the Bonus-Malus System (BMS). In order to unravel the "contract timing effect", one has to characterize the impact of current claiming decision on future claiming behaviors under this multiple-period framework. However, the conventional Expected Utility model only takes the claim number into account when it comes to characterize this impact, and cannot provide a reasonable explanation of the "contract timing effect". In this work, by applying the concepts of "reference point" and "mental accounting" from Behavioral Economics, our proposed behavioral model characterizes the impact by both the number of occurred claims and the dollar amount of occurred claims, and therefore be able to fully disentangle the "contract timing effect" in automobile insurance claiming behavior