Scandinavian Working Papers in Economics

Working papers in Transport Economics,
CTS - Centre for Transport Studies Stockholm (KTH and VTI)

No 2011:2: Predictors of customer loyalty in automobile insurance - The role of private information in risky driving behavior and claim history

Sara Arvidsson ()
Additional contact information
Sara Arvidsson: VTI, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden

Abstract: 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.

Keywords: Asymmetric information; insurance; accidents; adverse selection; propitious selection

JEL-codes: D82

27 pages, November 16, 2011

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CTS2011-2.pdf PDF-file

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