Claims and deductibles for homeowner\u27s insurance

This dissertation examines the interplay between claims and deductibles in homeowner\u27s insurance. In the first essay, I examine the effect of marketing cues on asymmetric information. Economic theories of asymmetric information predict that customers who are more likely to file claims during the coverage period will choose lower deductibles on their policies. One of the challenges in testing this theory is that customers may exhibit inertia and not consider their insurance options for an extended period of time. Furthermore, the ultimate trigger for a deductible change could be a factor unrelated to that customer\u27s expected claim propensity, such as a pricing change or marketing activity. Hence, the rate at which a customer files a claim after a deductible change may be related to why the deductible change was made at all. In the second essay, I introduce the concept of the pseudodeductible, a latent threshold above the policy deductible that governs the propensity (or reluctance) of a homeowner to file a claim when the underlying loss is covered by insurance. I show how the observed number of claims can be modeled as the output of three stochastic processes: the rate at which losses occur, the size of each loss, and the choice of the individual to file or not file a claim. Using mixtures of Dirichlet processes to capture heterogeneity, I uncover several relevant stories that underlie the frequency and severity of claims. For instance, some customers have few losses, but all are filed as claims, while others may experience many more losses, but are more selective about which claims they file. These stories explain several observed phenomena regarding the claims decisions that insurance customers make, and have broad implications for customer lifetime value and market segmentation