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Effects of Monitoring Technology on the Insurance Market

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Listed:
  • Yu‐Hung Chen
  • Baojun Jiang

Abstract

The car‐insurance market is plagued with problems of adverse selection and moral hazard. In‐vehicle data recorders can collect massive amount of information about the drivers’ driving behaviors and risk factors. This monitoring technology allows the firm to charge a premium based on the customer's recorded driving behaviors; this helps to reduce the driver's moral hazard. It can also allow the firm to set its insurance premium based on better estimates of the driver's risk factors, alleviating the adverse‐selection problem. We provide an analytical framework to examine the impact of such monitoring technology on the insurance firms and the drivers. Our analysis shows that in a duopoly one firm's adoption of the monitoring technology may benefit both firms, because the firms have incentives to target different segments of drivers, leading to less intense competition in the market and reducing the surplus of the drivers. We show that if one firm has adopted the monitoring technology, its competitor may have no incentive to adopt that technology even if the acquisition cost is zero.

Suggested Citation

  • Yu‐Hung Chen & Baojun Jiang, 2019. "Effects of Monitoring Technology on the Insurance Market," Production and Operations Management, Production and Operations Management Society, vol. 28(8), pages 1957-1971, August.
    • Handle: RePEc:bla:popmgt:v:28:y:2019:i:8:p:1957-1971
    DOI: 10.1111/poms.13023
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    Cited by:

    1. Tommaso Valletti & Jiahua Wu, 2020. "Consumer Profiling with Data Requirements: Structure and Policy Implications," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 309-329, February.
    2. Marta Rocha & Thomas Greve, 2021. "Contracting in a Market with Differential Information," Journal of Industry, Competition and Trade, Springer, vol. 21(2), pages 193-210, June.
    3. Yi‐Jen (Ian) Ho & Siyuan Liu & Jingchuan Pu & Dian Zhang, 2022. "Is it all about you or your driving? Designing IoT‐enabled risk assessments," Production and Operations Management, Production and Operations Management Society, vol. 31(11), pages 4205-4222, November.
    4. Tian , Xiaoguang & Prybutok, Victor & Mirzaei, Fouad & Dinulescu, Catalin C., 2020. "Millennials Acceptance of Insurance Telematics: An Integrative Empirical Study," American Business Review, Pompea College of Business, University of New Haven, vol. 23(1), pages 156-181, May.

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