A Deductible Selection Model. Development and Application

Abstract

The decision process involved in the selection of an optimum automobile collision insurance deductible provides an excellent opportunity to utilize the von NeumannMorgenstem utility development. In an extension of the theoretical formulations presented previously for this decision, a model was developed which was based upon a minimization of expected dis-utility. An intelview technique was used to develop dollar-dis-utility coordinates for each of ten subjects. A least squares program was invoked to fit a function to these data. These functions were then used in the model, along with both subjective and objective probabilities of loss plus premiums applicable to the individual, to arrive at an optimum deductible. Results of checking the model for reliability and validity are reported along with a comparison of actual with predicted deductibles. The model, as anticipated, was not descriptive. It is contended, however, that in a qualified normative sense it is a valuable decision tool. The selection of an optimum automobile collision insurance deductible by an individual is a decision exceptionally well suited to the application of a decision model incorporating von Neumann-Morgenstem utility. Previous efforts in this direction have been limited to a theoretical formulation. Herein is reported the results of a study designed to develop and utilize a model in an actual decision