The Effect of Franchise on Moral Hazard in Car Insurance Claims: The Case of Car Insurance in Tehran

Insurer undertakes compensation of events such as collision, upset, explosion and clash of car with any substance in the case of automobile insurance. Since the demand for car insurance is increasing in recent years, detection of factors affecting decision to make fraudulent claims becomes urgent. Insurance fraud occurs when the insured makes a false claim which cannot easily be verified. In fact, these falsifications cause disturbance in the process of financial estimation of insurers and consequently lead to major amount of losses.
The main objective of this research is to study the effect of deductibles on the size of falsification deliberately reported by the insured. We assess under the situation of deductible level shifting up, how the parameters of a contract affect the incentives for fraudulent activities.
Using a survey of 600 car insurance policies sold by Iran Insurance Company in Tehran at the year 1390, we utilize the extended Tobit model with unobservable threshold and Maximum Likelihood methods to verify that increasing in the level of deductible will increase the fraudulent claims of policy holders. We also found that the price of car has negative effect on fraudulent claims. In other words, the fraudulent claims decline when the price of car increases.