Commodity Bundling in the Japanese Non-Life Insurance Industry: Savings-Type Products as Self-Selection Mechanism
This paper develops a self-selection explanation for the use of commodity bundling in the case of savings-type casualty insurance in Japan. The institutional characteristics of the savings-cum-insurance bundle are explained in detail. Two alternative models to explain its success are presented. The moral hazard model assumes that casualty insurance claims are cause by unobservable discretionary actions of the insured (lack of care), while the adverse selection model is centered around the assumption that consumers have private information about their exogenous claim probability. The likelihood of a claim is assumed to fall as personal income rises, because preventive safety measures are normal goods and wealthier people therefore purchase more safety. The predictions of these two models are then compared to evidence from casualty insurance in Japan. The adverse selection theory is on balance better supported, while the moral hazard story is inconsistent with some of the institutional and empirical facts.
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