Modeling the "Pseudodeductible" in Insurance Claims Decisions

In many different managerial contexts, consumers "leave money on the table" by, for example, their failure to claim rebates, use available coupons, and so on. This project focuses on a related problem faced by homeowners who may be reluctant to file insurance claims despite the fact their losses are covered. We model this consumer decision by introducing the concept of the "pseudodeductible," a latent threshold above the policy deductible that governs the homeowner's claim behavior. In addition, we show how the observed number of claims can be modeled as the output of three stochastic processes that are separately, and in conjunction, managerially relevant: the rate at which losses occur, the size of each loss, and the choice of the individual to file or not file a claim. By allowing for the possibility of pseudodeductibles, one can sort out (and make accurate inferences about) these three processes. We test this model using a proprietary dataset provided by S...

• Type: Journal
• Year: 2006
• Where: MANSCI
• Authors: Michael Braun, Peter S. Fader, Eric T. Bradlow, Howard Kunreuther
• Keywords: Available Coupons, Insurance Claims, Latent Threshold, MANSCI 2006