Effects of Insurance Incentives on Road Safety: Evidence from a Natural Experiment in China

Abstract

We contribute to the growing literature on moral hazard by offering empirical evidence of the effectiveness of insurance pricing incentives at improving road safety by comparing the claim frequency following a regulatory reform introduced in a pilot city in China with the experience of another city unaffected by the reform. By using the methodology of difference-in-differences, we find that improving insurance pricing on past claims and on traffic violations with full industry commitment reduces moral hazard and insured drivers’ claim frequency by 12%. The treatment effects are, however, heterogeneous with respect to insured drivers’ wealth and past claims history.