Does private information affect the insurance risk? Evidence from the automobile insurance market
AbstractThis paper empirically investigates the effect of policyholders’ private information about risky traffic behavior on automobile insurance coverage and ex post risk. It combines insurance company information with the policyholders’ private information on risky traffic behavior (traffic violations) that is not accessible to the insurance company. It is demonstrated that being unable to reject the null of zero correlation is not consistent with symmetric information in the automobile insurance market. A positive significant correlation for three out of ten groups of new policyholders is found, consistent with the adverse selection/moral hazard prediction. Besides, private information about risky traffic behavior increases ex post risk while it both increases and reduces the demand for extensive insurance. Our conclusion is that the ambiguity of previous findings in the automobile insurance market may be explained by that high risks have different demand for extensive insurance coverage.
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Bibliographic InfoPaper provided by Swedish National Road & Transport Research Institute (VTI) in its series Working Papers with number 2010:1.
Length: 56 pages
Date of creation: 12 Jan 2010
Date of revision: 03 Feb 2011
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Postal: VTI, Transport Economics, P.O. Box 6056, SE-171 06 Solna, Sweden
Phone: +46-13-20 40 00
Fax: +46-13-14 14 36
Web page: http://www.vti.se/tek
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Adverse selection; Moral hazard; Propitious selection; Insurance;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-CTA-2010-01-23 (Contract Theory & Applications)
- NEP-IAS-2010-01-23 (Insurance Economics)
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