Advantageous Selection, Moral Hazard, and Insurer Sorting on Risk in the U.S. Automobile Insurance Market

Area of Science:

• Economics
• Insurance Studies
• Behavioral Economics

Background:

• Understanding consumer behavior in insurance markets is crucial.
• Private information significantly influences insurance policy choices.
• Assessing the interplay between selection, moral hazard, and insurer strategies is complex.

Purpose of the Study:

• To quantify the impact of private information on automobile insurance policy selection.
• To examine the relationship between accident risk, insurance coverage, and insurer sorting.
• To investigate the role of consumer attributes in insurer rating and driver selection.

Main Methods:

• Utilized data on subjective beliefs, risk preferences, and driving behavior.
• Merged individual policy data with independent insurer quality ratings.
• Employed econometric analysis to assess correlations and causal links.

Main Results:

• Found a zero correlation between ex post accident risk and insurance coverage.
• Observed advantageous selection in policy choice, counteracted by moral hazard.
• Demonstrated insurer sorting based on observable consumer attributes.
• Identified that lower-risk drivers, based on insurer-observed attributes, select higher-quality rated insurers.

Conclusions:

• Private information plays a significant role in auto insurance choices, but its net effect on risk and coverage is neutral due to offsetting mechanisms.
• Insurers actively sort consumers, with lower-risk individuals benefiting from higher-quality insurance providers.
• The findings highlight the complex dynamics of information asymmetry and strategic behavior in the automobile insurance market.