Sara Arvidsson: VTI, Postal: Dept. of Transport Economics, P.O. Box 920, SE-781 29 Borlänge, Sweden
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.
56 pages, First version: January 12, 2010. Revised: February 3, 2011. Earlier revisions: February 3, 2011.
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