Working Paper: NBER ID: w27189
Authors: Nicola Gennaioli; Rafael La Porta; Florencio Lopez-de-Silanes; Andrei Shleifer
Abstract: We assemble and analyze a new data set of homeowner insurance claims from 28 independently operated country subsidiaries of a multinational insurance company. A fundamental feature of the data is that such claims are often disputed, and lead to rejections or lower payments. We propose a new model of insurance, in which consumers can make invalid claims and firms can deny valid claims. In this environment, trust and honesty are critical factors that shape insurance contracts and the payment of claims, especially when the disputed amounts are too small for courts. We characterize equilibrium insurance contracts, and show how they depend on the quality of the legal system and the level of trust. We then investigate the incidence of claims, disputes and rejections of claims, and payment of claims in our data, as well as the cost and pricing of insurance. The evidence is consistent with the centrality of trust for insurance markets, as predicted by the model.
Keywords: Trust; Insurance; Contracts; Claims; Cultural Factors
JEL Codes: D23; G22; L14; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher trust (Z13) | fewer claims disputes (G52) |
| higher trust (Z13) | higher average settlement amount (K41) |
| higher trust (Z13) | lower operational costs for insurance companies (G22) |
| higher trust (Z13) | fewer rejected claims (G22) |
| higher trust (Z13) | improved overall claim resolution efficiency (J52) |