Academic journal article Journal of Risk and Insurance

Personal Bias in Automobile Claims Settlement

Academic journal article Journal of Risk and Insurance

Personal Bias in Automobile Claims Settlement

Article excerpt

ABSTRACT

Despite the importance of claims handling practices to consumers and insurers, relatively little research has been done in this area. Our purpose here is to consider one aspect of automobile bodily injury liability claims management: the assignment of fault across parties as judged by the insured defendant's claims adjuster. Because legal fault assessment directly affects whether a defendant is held liable, and if so, for how much, this aspect of claims management is significant. We use accident data from the 1997 Insurance Research Council Closed Claim Survey to test for relationships between fault assessment and gender, age, and state comparative negligence rules. Controlling for actual fault, we find a greater assessment of fault against female, young, and elderly drivers. The results of the study are of interest to insurers seeking to provide better customer service, to consumer advocacy groups interested in claims settlement practices, and to insurance regulators.

INTRODUCTION

In 1998, the average cost of automobile insurance in the United States was $705 per year per vehicle, and expenditures on private passenger automobile insurance totaled $119 billion (Insurance Information Institute, 2001). Approximately 15 percent of personal auto premiums were used for loss adjustment (A. M. Best, 2001). In addition to being costly, claims adjusting represents the most important direct contact between insurers and customers after sale. Despite the importance of claims handling practices to consumers and insurers, relatively little research has been done in this area. A few studies focus on the insurer's role in claims settlement, such as how organizational characteristics affect claims service quality, or the effect of claims payment practices on insurer total costs (see Doerpinghaus, 1991; Barrese et al., 1995; Browne and Wells, 1999). Others have analyzed the effect of the legal system on the claims process, including the plaintiff's willingness to litigate or settle, and circumstances und er which an attorney is more likely to be involved in the negotiations (see Cummins and Tennyson, 1996; Kritzer, 1998; Kritzer and Krishnan, 1999).

The purpose of this article is to provide information on a previously unexamined aspect of claims management, namely, the potential for bias associated with personal demographic characteristics and state liability rules on claims adjuster assessment of fault. To test for claims adjuster bias, we use a rich data set from the Insurance Research Council (IRC) on automobile insurance claims closed within a two-week period during 1997. Each time a claim was closed during this period, the claims adjuster was asked to complete a detailed record of the claim, containing approximately 250 pieces of information.

We examine data for 17,367 bodily injury liability claims in which two cars were involved. The percentage of fault assigned by the claims adjuster against the insured defendant is not necessarily a figure that has been resolved or agreed on by the parties or by a court, which would be the case with the claims payment amount. Using fault assignment percentages strengthens the model's measure of the perspective or "bias" of the claims adjuster versus measuring the claims payment amount, which reflects the outcome of a bargaining process. A significant number of cases report either 100 percent or 0 percent fault assessed against the insured defendant. Since these cases may involve less opportunity for claims adjuster judgment, we also consider a reduced sample of 2,130 observations in which 0 percent and 100 percent fault claims are omitted.

Consistent with previous economic literature, we find higher assessed fault against female, young, and elderly insured defendants, all else remaining equal. These findings are of interest to insurers seeking to provide better customer service, to consumer advocacy groups interested in fair claims settlement practices, and to insurance regulators. …

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