Influence of parties' behavioural features on motor compensation disputes in insurance markets

Abstract

Disputes between parties involved in motor insurance claims compensations are analysed. The decision to resolve the disagreement by either negotiation or trial may depend on how risk and confrontation adverse or pessimistic the claimant is. The extent to which these behavioural features of the claimant might influence thefinal compensation amount is examined. An empirical analysis,fitting a switching regression model to a Spanish database, is conducted in order to analyse whether the choice of the conflict resolution procedure is endogenous to the compensation outcomes. The results show that compensations awarded by courts are always higher, although 95% of cases are settled by negotiation. We show that this is because claimants are adverse to risk and confrontation, and are pessimistic about their chances at trial. By contrast, insurers are risk/confrontation neutral and more objective in relation to the expected trial compensation. During the negotiation insurers accept to pay the subjective compensation values of claimants, since these values are lower than their estimates of compensations at trial.