Testing for Offsetting Behavior and Adverse Recruitment among Drivers of Airbag-Equipped Vehicles
Harless, David W., Hoffer, George E., Journal of Risk and Insurance
Earlier studies reported that an insurance industry index of personal-injury claims rose after automobiles adopted driver's side airbags and that drivers of airbag-equipped vehicles were more likely to be at fault in fatal multivehicle accidents. These findings can be explained by the offsetting behavior hypothesis or by at-risk drivers systematically selecting vehicles with airbags (i.e., adverse recruitment). We test for offsetting behavior and adverse recruitment after airbag adoption using a database containing information on fatal accidents including information on drivers' previous records and drivers' actions that contributed to the occurrence of the accident. Further, we re-examine the personal injury claims index data for newly airbag-equipped vehicles and show that the rise in the index after airbag adoption may be attributable to moral hazard and a new vehicle ownership pattern. Rental car drivers are much more likely to commit grievous acts than other drivers, and the proportion of new automobiles in daily rental service more than doubled during the period of airbag adoption.
For almost 30 years, a number of researchers have reported evidence that changes in driver behavior may mitigate some of the benefits expected from the adoption of automotive safety appliances. Recent evidence comes from Peterson and Hoffer (1994, 1996) who analyzed nationwide insurance industry statistics and found that adoption of an airbag results in higher personal injury claims and collision frequency for a vehicle line. Analysis of fault in fatal motor vehicle accidents in Virginia in 1993 (Peterson, Hoffer, and Millner, 1995) suggests that the driver of the vehicle equipped with an airbag is more likely to be at fault in a multiple-vehicle accident. One explanation for this evidence is offsetting behavior: (1) drivers, having self-insured by purchasing an airbag, know that the loss in the event of an accident is lower and drive more aggressively as a result. Another explanation, having quite different policy implications, is that of "adverse recruitment": drivers who are at greater risk of an accident are more likely to self-insure by choosing airbag-equipped vehicles.
Adverse recruitment and offsetting behavior in the context of self-insurance carry implications concerning the choice to insure and potential changes in behavior after insuring that parallel those of adverse selection and moral hazard in the usual insurance situation, except that there is no asymmetric information problem as the insured and insurer are one. In a review of econometric models of insurance with asymmetric information, Chiappori (2000) notes that both adverse selection and moral hazard imply a correlation of risk and insurance coverage but imply causality running in different directions. Under adverse selection, different levels of risk cause individuals to select different insurance coverage, whereas under moral hazard, individuals make an insurance choice and then the existence of insurance changes the incentive for self-protective activities resulting in a change in the probability of an accident. Chiappori notes the difficulties involved in untangling the correlated risk and insurance coverage and reviews various strategies that have been applied; some of the difficulties arise from endogeneity of insurance pricing and experience rating as an omitted or misspecified variable (Chiappori, 2000; Dionne, Gourieroux, and Vanasse, 2001). Study of the related concepts "adverse recruitment" and "offsetting behavior" in the case of self-insurance involves the same problem of untangling the reasons for the correlation of risk and (self) insurance coverage but avoids the complications introduced by contracting and asymmetric information.
We test for offsetting behavior and adverse recruitment resulting from airbag adoption using data from the U.S. Department of Transportation's Fatal Accident Reporting System (FARS) database that contains information on every motor-vehicle accident in the United States resulting in a fatality (National Highway Traffic Safety Administration, 1997). …