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Trust and Insurance Contracts

Author

Listed:
  • Nicola Gennaioli
  • Rafael La Porta
  • Florencio Lopez-de-Silanes
  • Andrei Shleifer
Abstract
We assemble and analyze a new data set of homeowner insurance claims from 28 independently operated country subsidiaries of a multinational insurance company. A fundamental feature of the data is that such claims are often disputed, and lead to rejections or lower payments. We propose a new model of insurance, in which consumers can make invalid claims and firms can deny valid claims. In this environment, trust and honesty are critical factors that shape insurance contracts and the payment of claims, especially when the disputed amounts are too small for courts. We characterize equilibrium insurance contracts, and show how they depend on the quality of the legal system and the level of trust. We then investigate the incidence of claims, disputes and rejections of claims, and payment of claims in our data, as well as the cost and pricing of insurance. The evidence is consistent with the centrality of trust for insurance markets, as predicted by the model.

Suggested Citation

  • Nicola Gennaioli & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2020. "Trust and Insurance Contracts," NBER Working Papers 27189, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27189
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    References listed on IDEAS

    as
    1. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
    2. Laura Bottazzi & Marco Da Rin & Thomas Hellmann, 2016. "Editor's Choice The Importance of Trust for Investment: Evidence from Venture Capital," The Review of Financial Studies, Society for Financial Studies, vol. 29(9), pages 2283-2318.
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    7. Jean-Marc Bourgeon & Pierre Picard, 2014. "Fraudulent Claims and Nitpicky Insurers," American Economic Review, American Economic Association, vol. 104(9), pages 2900-2917, September.
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    18. repec:hal:spmain:info:hdl:2441/4km7l02j139aj8hl7kcccmqk9s is not listed on IDEAS
    19. Philippe Aghion & Yann Algan & Pierre Cahuc & Andrei Shleifer, 2010. "Regulation and Distrust," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1015-1049.
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    Cited by:

    1. Peter John Robinson & W. J. Wouter Botzen, 2022. "Setting descriptive norm nudges to promote demand for insurance against increasing climate change risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(1), pages 27-49, January.
    2. Armantier, Olivier & Foncel, Jérôme & Treich, Nicolas, 2023. "Insurance and portfolio decisions: Two sides of the same coin?," Journal of Financial Economics, Elsevier, vol. 148(3), pages 201-219.
    3. Abe Dunn & Joshua D Gottlieb & Adam Hale Shapiro & Daniel J Sonnenstuhl & Pietro Tebaldi, 2024. "A Denial a Day Keeps the Doctor Away," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(1), pages 187-233.
    4. Martin Eling & Irina Gemmo & Danjela Guxha & Hato Schmeiser, 2024. "Big data, risk classification, and privacy in insurance markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(1), pages 75-126, March.
    5. Xudong An & Sadok El Ghoul & Omrane Guedhami & Ross Levine & Raluca Roman, 2023. "Social Capital and Mortgages," Working Papers 23-23, Federal Reserve Bank of Philadelphia.
    6. Tao Sun, 2021. "Societal trust, risk avoidance and corporate risk taking: evidence from the global insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(4), pages 513-546, October.
    7. María Rubio-Misas, 2024. "Supervisory power and insurer financial stability: the role of institutional quality," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(4), pages 804-830, October.
    8. Limbach, Peter & Rau, P. Raghavendra & Schürmann, Henrik, 2023. "The decline of trust across the U.S. finance industry," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 324-344.
    9. Francesco D'Acunto & Jin Xie & Jiaquan Yao, 2020. "Trust and Contracts: Empirical Evidence," CESifo Working Paper Series 8714, CESifo.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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