Does Private Information Influence Automobile Insurance Purchase Decisions?

51 Pages Posted: 17 Nov 2014 Last revised: 3 Jul 2023

See all articles by Frank A. Sloan

Frank A. Sloan

Duke University - Center for Health Policy, Law and Management; Duke University, Fuqua School of Business-Economics Group; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Alex Robinson

affiliation not provided to SSRN

Alex Robinson

Duke University, Department of Economics, Students

Lindsey M. Eldred

Duke University

Date Written: November 2014

Abstract

This study quantifies the importance of private information, separates the extent to which the positive correlation between the accident probability and insurance coverage reflects adverse selection and moral hazard, and analyzes market segmentation on objective accident risk. We use data we collected to examine the importance of potential sources of private information in individualsʼ third- and first-party insurance choices. Individuals with higher subjective accident probabilities have less liability exposure post insurance purchase and more often experience an accident, conditional on factors insurers use for risk classification. This evidence is consistent with the positive correlation between accident occurrence and liability insurance coverage. We find that the positive correlation almost completely reflects adverse selection. In analysis of insurer sorting, we find that accident-free drivers obtain coverage from insurers with higher independent agency quality ratings. High-quality insurers eschew low-quality drivers on measured dimensions because these drivers are more likely to possess private information about their driving ability and proclivities that affect expected loss. Drivers with a higher risk on factors observable to insurers tend to have private information about their accident risk. This sorting process reflects an institutional response to asymmetric information, and assures a continuous supply of private insurance to unsafe drivers.

Suggested Citation

Sloan, Frank A. and Robinson, Alex and Robinson, Patricia and Eldred, Lindsey M., Does Private Information Influence Automobile Insurance Purchase Decisions? (November 2014). NBER Working Paper No. w20679, Available at SSRN: https://ssrn.com/abstract=2526034

Frank A. Sloan (Contact Author)

Duke University - Center for Health Policy, Law and Management ( email )

Box 90253
Durham, NC 27708
United States
919-684-8047 (Phone)
919-684-6246 (Fax)

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alex Robinson

affiliation not provided to SSRN

Patricia Robinson

Duke University, Department of Economics, Students ( email )

Durham, NC
United States

Lindsey M. Eldred

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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