Do customers opt for insurance products with a simplified loss settlement logic?
Type
working paper
Date Issued
2025-06-02
Author(s)
Abstract
P&C products with simplified loss settlement logic (SLSL) can reduce insurers' combined ratios by up to 5 percentage points through lower underwriting and claims administration costs. However, these products introduce basis risk for policyholders. As shown in the theoretical section of our paper, normative-rational policyholders tend to combine traditional indemnity insurance with SLSL-based insurance to mitigate this risk. In the empirical section, we investigate the willingness to pay (WTP) for SLSL-based insurance through a framed behavioral experiment with a low sum insured. The experiment reveals no significant difference in WTP between indemnity insurance and SLSL-based products. This could be for a number of reasons, including the possibility that participants do not fully understand basis risk and its implications, that the convenience of insuring with an SLSL outweighs the basis risk, or that they find the value of the products similar if the basis risk is not severe. Insurers could test the demand for insurance with a SLSL in a pilot setting. However, insurers and regulators should proceed very cautiously to mitigate the risks of reputational damage and potential litigation.
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0_Paper_1 (1).pdf
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