A Note on the Observability and the Influence on the Incentive System

The insured’s effort that can lower the accident probability are grouped under two parts. Before the insurance contract holds, one can be observed by insurer, the other cannot be observed. The difference in observability is closely related to the difference in discount rate of premiums. The insurer discounts for insured that makes an effort if this effort can be observed. However, if that effort cannot be observed, the insurer at most discounts for insured that does not occur the accident. The purpose of this paper is to compare these two situations. This paper provides two propositions. First proposition is that the existence of observability lowers the discount rate of premiums in order to facilitate the insured’s effort. Second proposition is that the existence of observability enhances the possibility to realize the desirable outcome that the insurer proposes the discount rate of premiums and the insured makes an effort