A research paper authored by Laurenz Hommel and Hato Schmeiser, titled «Do Customers Opt for Insurance Products with a Simplified Loss Settlement Logic?», has been accepted for publication in the Risk Management and Insurance Review.
Abstract:
Property and casualty (P&C) insurance products featuring a simplified loss settlement logic (SLSL) can reduce insurers’ combined ratios by up to five percentage points through lower underwriting and claims administration costs. However, these products introduce basis risk for policyholders.In the theoretical section, we show that normative-rational policyholders tend to combine traditional indemnity insurance with SLSL-based products to mitigate this risk. The empirical section examines the willingness to pay (WTP) for SLSL-based insurance through a framed behavioral experiment with a low sum insured.
The results reveal no significant difference in WTP between indemnity insurance and SLSL-based products. Possible explanations include: (i) limited understanding of basis risk among participants, (ii) a perceived convenience benefit of SLSL products that offsets the basis risk, or (iii) similar perceived value when basis risk is moderate.
The findings suggest that insurers could explore pilot offerings of SLSL-based insurance. Nevertheless, both insurers and regulators should proceed with caution to avoid potential reputational or legal risks.