Insurance Markets When Firms Are Asymmetrically Informed: A Note

Jason Strauss and Aidan HollisUniversity of Calgary

Presenting: Jason Strauss, Candidate, M.A. (Economics)

Previous Research

• Barros, P., 1993, Freedom of Service and Competition in Insurance Markets: A Note, Geneva Papers on Risk and Insurance.

• Crocker, K. J., and A. Snow, 1986, The Efficiency Effects of Categorical Discrimination in the Insurance Industry, Journal of Political Economy.

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Event data recorders (EDRs), telematics, and GPS systems

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EDRs enable the collection, storage, and transmission of data to an insurer on how a motor vehicle is operated for the purposes of pricing an automobile insurance policy.

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Patents

• Progressive Casualty Insurance Company– U.S. Patent Nos. 5,797,134 and 6,064,970 and 6,868,386. – Canadian Patent Nos. 2,494,638, 2,344,781, and 2235566– UK Patent Application

LICENSEES:

• Aviva Canada Inc.• Norwich Union Insurance Limited, (UK)

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Assumptions

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• Only one insurer is well-informed.

Assumptions

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Assumptions

• Only one insurer is well-informed.• Consumers do not know their risk-type.

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Research Question

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• What are the welfare effects of asymmetrically informed insurers?

Research Question

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• What are the welfare effects of asymmetrically informed insurers?– If insurers can separate low and high risk

consumers with a menu of contracts.

Research Question

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• What are the welfare effects of asymmetrically informed insurers?– If insurers can separate low and high risk

consumers with a menu of contracts.– If insurers cannot separate low and high risk

consumers with a menu of contracts.

Research Question

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Welfare Effects

Scenarios:

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Scenarios:• If insurers can separate risks

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Welfare Effects

Scenarios:• If insurers can separate risks

• If insurers cannot separate risks

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Welfare Effects

Scenarios:• If insurers can separate risks

– Welfare Effects are Positive

• If insurers cannot separate risks

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Welfare Effects

Scenarios:• If insurers can separate risks

– Welfare Effects are Positive

• If insurers cannot separate risks– Consumer Welfare Decreases

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Welfare Effects

Scenarios:• If insurers can separate risks

– Welfare Effects are Positive

• If insurers cannot separate risks– Consumer Welfare Decreases– Overall Welfare within the R&S world is unchanged

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Welfare Effects

Scenarios:• If insurers can separate risks

– Welfare Effects are Positive

• If insurers cannot separate risks– Consumer Welfare Decreases– Overall Welfare within the R&S world is unchanged – Well-informed insurer’s profits equal loss in consumer surplus

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Welfare Effects

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Welfare Effects

Welfare Effects

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Conclusion

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Conclusion• The welfare effects depend on whether

insurers can separate consumers:

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Conclusion• The welfare effects depend on whether

insurers can separate consumers:– If they can, the welfare effects are positive.

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Conclusion• The welfare effects depend on whether

insurers can separate consumers:– If they can, the welfare effects are positive. – If they cannot, consumer surplus decreases but

overall welfare is unchanged, well-informed insurer gains positive profits.

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Conclusion• The welfare effects depend on whether

insurers can separate consumers:– If they can, the welfare effects are positive. – If they cannot, consumer surplus decreases but

overall welfare is unchanged, well-informed insurer gains positive profits.

• When the demand for “driving” is considered, EDR technology could have a negative effect on welfare, but not necessarily.

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Conclusion• The welfare effects depend on whether

insurers can separate consumers:– If they can, the welfare effects are positive. – If they cannot, consumer surplus decreases but

overall welfare is unchanged, well-informed insurer gains positive profits.

• When the demand for “driving” is considered, EDR technology could have a negative effect on welfare, but not necessarily.

• Also, what about privacy? (the topic of our 2nd paper)

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Welfare Effects

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