More than 1.5 million vehicles collide with deer annually, killing hundreds of p

Question

More than 1.5 million vehicles collide with deer annually, killing hundreds of people and causing over $1 billion in vehicle damage. Some states, such as Michigan, attribute one in seven vehicle accidents to deer. Additional evidence indicates that many deer-related accidents go unreported.

The problem escalates in the fall of each year during deer mating season as more deer are one the move. While deer whistles and other vehicle warning systems appear ineffective in dealing with the problem, clearing brush in the road ditches to make deer more visible appears to help. Deer warning signs also appear to make drivers more vigilant and lower the deer vehicle collisions. What’s the best advice? Drivers should be cautious when in deer country and when you see one deer there are likely others around.     

Driving an insured vehicle in deer country could create a moral hazard problem. Since the insured knows the company will cover losses, it might make people less vigilant. While it may not be the case with automobile insurance, we do see people take more risks if they know they will not bear the entire burden of the possible negative outcome of their action.

1.    What is the purpose of automobile insurance?    

2.    How does insurance encourage risky behavior?

3.    If insurance companies did not cover deer/vehicle collisions or had a very high deductible, what should we observe?

Explanation / Answer

1. The purpose of automobile insurance is to compensate for the loss that occured to the insuree in order to provide financial aid at the time of mishap/accident/burn/damage.

2.  The problem of moral hazard is particularly associated with the insurance market. Moral Hazard is the possibility of dishonest behavior in situations where behavior is imperfectly monitored. Here an insured person has an incentive to initiate actions that are harmful to the product insured simply because they are insured. This is the reason why insurance encourage risky behavior.

3. If inurance companies did not cover deer/vehicle collisions we would observe a dramatic fall in the number of accidents since then people will be responsible for their own fate and behavior and they might realize the importance of their life.

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