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

31 Pages Posted: 5 Jun 2018

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

Duke University, Department of Economics, Students

Lindsey M. Eldred

Duke University

Date Written: June 2018

Abstract

This study quantifies the role of private information in automobile insurance policy choice using data on subjective beliefs, risk preference, reckless driving, the respondent's insurer, and insurance policy characteristics merged with insurer‐specific quality ratings distributed by independent organizations. We find a zero correlation between ex post accident risk and insurance coverage, reflecting advantageous selection in policy choice offset by moral hazard. Advantageous selection is partly attributable to insurer sorting on consumer attributes known and used by insurers. Our analysis of insurer sorting reveals that lower‐risk drivers on attributes observed by insurers obtain coverage from insurers with higher‐quality ratings.

Suggested Citation

Sloan, Frank A. and Robinson, Patricia and Eldred, Lindsey M., Advantageous Selection, Moral Hazard, and Insurer Sorting on Risk in the U.S. Automobile Insurance Market (June 2018). Journal of Risk and Insurance, Vol. 85, Issue 2, pp. 545-575, 2018, Available at SSRN: https://ssrn.com/abstract=3189173 or http://dx.doi.org/10.1111/jori.12170

Frank A. Sloan

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

Patricia Robinson (Contact Author)

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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