The John M. Olin Center

Paper Abstract

371. Alma Cohen, Asymmetric Information and Learning in the Automobile Insurance Market, 06/2002; subsequently published as “Asymmetric Information and Learning: Evidence from the Automobile Insurance Market” in The Review of Economics & Statistics, Vol. LXXXVII, No. 2, May 2005, 197-207.

Abstract: This paper tests the predictions of adverse selection models using data from the automobile insurance market. In contrast to what recent research has suggested, I find that the evidence is consistent with the presence of informational asymmetries in this market: higher insurance coverage is correlated with more accidents. Consistent with the presence of learning by policyholders about their risk type, such a coverage correlation exists only for policyholders who have had three or more years of driving experience prior to joining their insurer. Consistent with the presence of learning by insurers about repeat customers, I find that, as the experience of the insurer with a group of policyholders increases, the coverage-accidents correlation declines in magnitude and eventually disappears. Finally, consistent with insurers' having more information about their repeat customers than would be available to other insurers, I find that policyholders who leave the insurer are disproportionately ones with a poor claims history with the insurer, and that insurers make higher profits on repeat customers than on new customers.

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