Risk of Claims and Moral Hazard for House Insurance in Canada

Abstract

We investigate the risk of claims using hazard models for house insurance for the three periods: prior to, during and after the financial crisis. The present study is based on the data provided by Property & Casualty Carrier for the Canadian Market. The semiparametric Cox proportional hazard model results suggest that Canada’s house insurance options (Bronze, Silver, Gold, and Platinum) influence the risk of claims. The smaller coverage option, Bronze, has much fewer claims than the complete coverage option, Gold. This may suggest the presence of a moral hazard problem. The financial crisis however impacted the role of the type of coverage had on the risks of claims reducing the moral hazard problem, after controlling for the characteristics of the houses.

Keywords:

• Home insurance
• risk of claims
• hazard models

Notes

1 Due to the anonymity requirement we will abbreviate this important Property & Casualty Carrier in the Canadian Market as PCC

2 “Bronze” = 13 main perils: fire, theft, lightning, explosion, smoke, falling objects, impact by land vehicle, riot, vandalism, water damage, windstorm or hail, glass breakage, transportation, electricity. “Silver” = Bronze + named perils on the content. “Gold” covers for all perils for both the building and the contents. “Platinum” = Gold + coverage for mysterious disappearance (if the owner can't prove that an item is lost, stolen or misplaced, Platinum option provided up to $6,000 worth of jewelry coverage)

Additional information

Funding

This work was supported by Mitacs.