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Does private information affect the insurance risk? Evidence from the automobile insurance market

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  • Arvidsson, Sara

    () (VTI)

Abstract

This 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.

Suggested Citation

  • Arvidsson, Sara, 2010. "Does private information affect the insurance risk? Evidence from the automobile insurance market," Working Papers 2010:1, Swedish National Road & Transport Research Institute (VTI), revised 03 Feb 2011.
  • Handle: RePEc:hhs:vtiwps:2010_001
    as

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    References listed on IDEAS

    as
    1. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, pages 249-262.
    2. Shogren, Jason F. & Crocker, Thomas D., 1991. "Risk, self-protection, and ex ante economic value," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 1-15, January.
    3. David Hemenway, 1990. "Propitious Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 1063-1069.
    4. Gunnar Lindberg, 2001. "Traffic Insurance and Accident Externality Charges," Journal of Transport Economics and Policy, University of Bath, vol. 35(3), pages 399-416, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Adverse selection; Moral hazard; Propitious selection; Insurance;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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