Privacy Concerns in Insurance Markets: Implications for Market Equilibria and Social Welfare

46 Pages Posted: 13 Nov 2019

See all articles by Irina Gemmo

Irina Gemmo

ETH Zurich

Mark J. Browne

St. John's University - Peter J. Tobin College of Business

Helmut Gründl

Goethe University Frankfurt - Department of Finance; International Center for Insurance Regulation

Date Written: September 23, 2019

Abstract

Telemonitoring devices can be used to screen consumer characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. Nevertheless, some consumers value their privacy and dislike sharing private information with insurers. In a second-best efficient Miyazaki-Wilson-Spence (MWS) framework, we allow consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as social welfare. We find that information disclosure can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare. Yet, if all consumers are offered cross-subsidizing contracts, the introduction of a screening contract decreases or even eliminates cross-subsidies. Given the prior existence of a cross-subsidizing MWS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis informs the discussion on consumer protection in the context of digitalization. It shows that new technologies challenge cross-subsidization in insurance markets, and it stresses the negative externalities that digitalization has on consumers who are unwilling to take part in this development.

Keywords: Adverse Selection, Insurance Markets, Privacy, Private Information, Screening

JEL Classification: D41, D52, D60, D82, G22

Suggested Citation

Gemmo, Irina and Browne, Mark J. and Gründl, Helmut, Privacy Concerns in Insurance Markets: Implications for Market Equilibria and Social Welfare (September 23, 2019). Available at SSRN: https://ssrn.com/abstract=3480629 or http://dx.doi.org/10.2139/ssrn.3480629

Irina Gemmo (Contact Author)

ETH Zurich

Zürichbergstrasse 18
Zürich, 8032
Switzerland

Mark J. Browne

St. John's University - Peter J. Tobin College of Business ( email )

New York, NY
United States

Helmut Gründl

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://https://www.wiwi.uni-frankfurt.de/en/departments/finance/home.html

International Center for Insurance Regulation ( email )

House of Finance
Campus Westend, Goethe University
Frankfurt am Main, D-60323
Germany

HOME PAGE: http://www.icir.de

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