Working Papers, Swedish National Road & Transport Research Institute (VTI)
No 2010:1:
Does private information affect the insurance risk? Evidence from the automobile insurance market.
Sara Arvidsson ()
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.
Keywords: Adverse selection; Moral hazard; Propitious selection; Insurance; (follow links to similar papers)
JEL-Codes: D82; (follow links to similar papers)
56 pages, January 12, 2010, Revised February 3, 2011
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