Asymmetric Information in Automobile Insurance: Evidence from Driving Behavior

Based on a unique data set of driving behavior we test whether private information in driving characteristics has significant effects on contract choice and risk in automobile insurance. We define a driving factor based on overall distance driven, number of car rides, and speeding. Using local weather conditions, we account for the endogeneity of the driving factor. While this driving factor has an effect on risk, there is no significant evidence for selection effects in the level of third-party liability and first-party insurance coverage

Asymmetric information in automobile insurance: evidence from driving behavior

Based on a unique data set of driving behavior we find direct evidence that private information has significant effects on contract choice and risk in automobile insurance. The number of car rides and the relative distance driven on weekends are significant risk factors. While the number of car rides and average speeding are negatively related to the level of liability coverage, the number of car rides and the relative distance driven at night are positively related to the level of first-party coverage. These results indicate multiple and counteracting effects of private information based on risk preferences and driving behavior