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More for less? Puzzling selection effects in the insurance market

Author

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  • Edmund Cannon
  • Giam Pietro Cipriani
  • Katia Bazar-Rosen

Abstract

We document a large and persistent anomaly in the UK car insurance market over the period 2012–13: insurance companies charged a higher premium for third-party (liability) insurance than comprehensive insurance (which includes third party). Furthermore, some companies charged higher premiums for comprehensive policies with larger deductibles. In contrast to current theories of adverse or propitious selection, our evidence suggests both that consumers are too confused or too poorly informed to arbitrage between policy types and that sellers of car insurance do not implement the incentive-compatibility constraints at the heart of consumer demand theory. This particular insurance market is much less sophisticated than that characterized by modern microeconomic theory.

Suggested Citation

  • Edmund Cannon & Giam Pietro Cipriani & Katia Bazar-Rosen, 2016. "More for less? Puzzling selection effects in the insurance market," Oxford Economic Papers, Oxford University Press, vol. 68(4), pages 879-897.
    • Handle: RePEc:oup:oxecpp:v:68:y:2016:i:4:p:879-897.
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    File URL: http://hdl.handle.net/10.1093/oep/gpw030
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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