Predictors of customer loyalty in automobile insurance - The role of private information in risky driving behavior and claim history
Contract-relevant information asymmetries are known to cause inefficien-cies in markets. The information asymmetry is largest in the beginning of the customer-insurer relationship but reduces over time; the longer a poli-cyholder stays with the insurer the more the insurer learns about the poli-cyholder’s risk. Two important characteristics of the market studied here imply that the information asymmetry may not be reduced for all policy-holders. First, insurers do not have access to traffic violations, which are predictors of risk since policyholders with traffic violations are more likely to report a claim. Second, the insurers do not share information, such as previous claims, which means that the policyholder can flee a poor claim record by switching insurer. Hence, there may be a selection of high risk customers who switch insurer more often, such that the information asymmetry in this group is never reduced. To test this, we compare infor-mation asymmetries in two groups of policyholders; new customers who stay with the insurer for a period or less (short term), and long-term cus-tomers who stay with the insurer for several periods (loyal). The results indicate that departing policyholders are disproportionately high risks that constitute an adverse selection of risks, while loyal policyholders constitute a propitious (favorable) selection of risks.
|Date of creation:||16 Nov 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.cts.kth.se/
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
- Limor Golan, . "Counteroffers and Efficiency in Competitive Labor Markets with Asymmetric Information," GSIA Working Papers 2002-E28, Carnegie Mellon University, Tepper School of Business.
- Alma Cohen, 2012.
"Asymmetric Learning in Repeated Contracting: An Empirical Study,"
The Review of Economics and Statistics,
MIT Press, vol. 94(2), pages 419-432, May.
- Alma Cohen, 2008. "Asymmetric Learning in Repeated Contracting: An Empirical Study," NBER Working Papers 13752, National Bureau of Economic Research, Inc.
- Alma Cohen & Peter Siegelman, 2009.
"Testing for Adverse Selection in Insurance Markets,"
NBER Working Papers
15586, National Bureau of Economic Research, Inc.
- Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
- Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
- Joshua C. Pinkston, 2009.
"A Model of Asymmetric Employer Learning with Testable Implications,"
Review of Economic Studies,
Oxford University Press, vol. 76(1), pages 367-394.
- Joshua C. Pinkston, 2006. "A Model of Asymmetric Employer Learning With Testable Implications," Working Papers 390, U.S. Bureau of Labor Statistics.
- Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
- Waldman, Michael, 1996. "Asymmetric learning and the wage/productivity relationship," Journal of Economic Behavior & Organization, Elsevier, vol. 31(3), pages 419-429, December.
- Alma Cohen, 2005. "Asymmetric Information and Learning: Evidence from the Automobile Insurance Market," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 197-207, May.
When requesting a correction, please mention this item's handle: RePEc:hhs:ctswps:2011_002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mats Berggren)
If references are entirely missing, you can add them using this form.