ESTIMATING CONSUMERS’ BEHAVIOUR IN MOTOR INSURANCE USING DISCRETE CHOICE MODELS

Insurance is a financial service in which consumption is highly affected by the characteristics of the potential buyer and his perceptions about the offered product. Motor insurance with its two components – the Motor Third Party Liability Insurance (MTPL) and the Motor Damage insurance – constitutes the largest line of business of the non-life insurance sector in Europe. The present study models the voluntary motor damage insurance consumer behaviour using discrete choice models, hypothesizing a hierarchical and a non-hierarchical decision. The sample consists of 311 car owners from Cluj County, Romania. The econometric estimations use binary logit, multinomial logit and nested logit models. The predictive power of these models is compared by means of the Receiver Operating Characteristic curve for discrete choice models. The results reveal that the main factors affecting the purchase of a voluntary motor insurance policy are risk preference/aversion, the distance travelled by car, the driver’s education level and the ratio between the driver’s income and the car price. In contrast to previous studies who estimated the risk profile only through proxy variables without accounting for any behavioural aspects, our study has successfully integrated the risk profile of the policyholders as a self-standing explanatory variable. Since the explanatory variables are representative not only for a particular geographical area, the highlighted behaviour may be applied to all cases where motor damage insurance is voluntary.