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A study of asymmetric information problems in vehicle insurance
Örebro University, Örebro University School of Business.
2014 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

Insurance is an indispensable part of modern welfare systems. It provides financial protection against unexpected losses and facilitates security and efficiency. Despite these benefits, the insurance literature predicts distortive effects of insurance provision in the form of asymmetric information problems such as adverse selection and moral hazard. However, empirical evidence does not provide unambiguous support for this theoretical prediction.

This dissertation empirically examines a theoretical prediction of the presence of asymmetric information problems in the case of vehicle insurance.

Essay 1 analyzes the effects of a tax reform in Sweden that raised the price of vehicle insurance. The results indicate that the tax reform has increased the odds of switching to lower insurance coverage, in particular among older drivers. However, this switching behavior has not resulted in a significant change of driver behavior in terms of claims.

Essay 2 uses a two-stage procedure to test for the presence of asymmetric information problems in the provision of vehicle insurance. In the first stage, we check for the presence of residual asymmetric information; in the second stage, we identify the source of the information problem, i.e. either adverse selection or moral hazard, or both. Our findings from the first stage estimation indicate the presence of residual asymmetric information in the choice of full insurance with a low deductible. The second stage estimation results reveal that the source of this information problem is moral hazard.

Essay 3 analyzes the impact of insurance on the probability of accidents by investigating the accident risk of insured and uninsured drivers. The results show that uninsured drivers have a higher probability of causing an accident than insured drivers, and that uninsured drivers aged 25-34 pose a greater accident risk than uninsured drivers in other age categories.

Place, publisher, year, edition, pages
Örebro: Örebro university , 2014. , 30 p.
Series
Örebro Studies in Economics, ISSN 1651-8896 ; 27
Keyword [en]
asymmetric information, insurance, moral hazard, traffic safety
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:oru:diva-36150ISBN: 978-91-7529-043-0 (print)OAI: oai:DiVA.org:oru-36150DiVA: diva2:741543
Public defence
2014-10-17, Forumhuset, Biografen, Örebro universitet, Fakultetsgatan 1, Örebro, 13:15 (English)
Opponent
Supervisors
Available from: 2014-08-28 Created: 2014-08-28 Last updated: 2017-10-17Bibliographically approved
List of papers
1. Empirical analysis of moral hazard: A study of avehicle insurance tax reform
Open this publication in new window or tab >>Empirical analysis of moral hazard: A study of avehicle insurance tax reform
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper uses discrete choice and count data models to analyze the effects of a tax on vehicle insurance levied in Sweden in 2007. The analysis is based on a large set of micro level panel data on individual insurance holders at the largest insurance company in Sweden for the period 2006- 2010. Two questions are addressed: How did the tax reform influence the choice of insurance coverage, and how did changes in coverage affect the incidence of claims? The results show that, on average, the tax reform increased the odds of choosing lower and cheaper insurance coverage, in particular for older policy holders. However, switching to lower coverage has not resulted in significant changes in claims.

National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:oru:diva-38891 (URN)
Projects
Keywords: vehicle insurance, moral hazard, traffic safety, tax reform
Note

Sherzod Yarmukhamedov is an employee of The Swedish National Road and Transport Research Institute (VTI)

Email: sherzod.yarmukhamedov@vti.se

Available from: 2014-11-21 Created: 2014-11-21 Last updated: 2017-10-17Bibliographically approved
2. Empirical analysis of asymmetric informationproblems in Swedish vehicle insurance
Open this publication in new window or tab >>Empirical analysis of asymmetric informationproblems in Swedish vehicle insurance
(English)Manuscript (preprint) (Other academic)
Abstract [en]

Vehicle insurance provides financial protection against unexpected personal injuries and property losses in case of a traffic accident. The theoretical literature predicts that this comes at a cost because of the negative incentive effects of insurance provision due to asymmetric information problems such as moral hazard and adverse selection.

While theoretical studies are agreed on the presence of asymmetric information problems in insurance markets, empirical studies still provide mixed evidence. Therefore, the purpose of this paper is to empirically test the presence of asymmetric information problems in the vehicle insurance market. Information asymmetries originate from the unobservability of driver behavior that hampers an efficient risk classification and leads to inaccurate contract pricing. Moreover, this paper proposes an alternative approach to distinguishing moral hazard from asymmetric learning by using a large panel dataset, obtained from a major Swedish insurance company for the period 2006-2010, to model the dynamics in coverage choice.

The results indicate that there is residual asymmetric information in the choice of full insurance with a low deductible, where the source of information asymmetry is a moral hazard. However, no evidence of such a problem is found in cases of full insurance with a high deductible and partial insurance. Policy implications are discussed at the end.

Keyword
asymmetric information, moral hazard, adverse selection, vehicle insurance
National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:oru:diva-38903 (URN)
Note

Sherzod Yarmukhamedov is also employed by The Swedish National Road and Transport Research Institute (VTI)

Available from: 2014-11-21 Created: 2014-11-21 Last updated: 2017-10-17Bibliographically approved
3. How risky are uninsured drivers?
Open this publication in new window or tab >>How risky are uninsured drivers?
(English)Manuscript (preprint) (Other academic)
Abstract [en]

Obtaining insurance is expected to have disincentive effects on driver behavior, and as such on accident probabilities due to the adverse selection and/or moral hazard effects, though empirical studies provide mixed evidence. The risks of an accident incurred by uninsured drivers are, however, indeterminate as well, because of the unavailability of individual level data on uninsured drivers. Therefore, the purpose of this paper is to empirically analyze whether insured or uninsured drivers pose greater accident risks. It uses unique individual level data on privately owned insured and uninsured passenger vehicles in Sweden for the period 2006-2010.

The results show that the accident probability of uninsured drivers is 34 percentage points higher than for insured drivers, with uninsured drivers aged 25-34 posing the highest risk of an accident. This implies that uninsured drivers are a high risk group and a significant threat to traffic safety. Possible solutions and policy implications are discussed at the end of the paper.

Keyword
vehicle insurance, uninsured drivers, traffic accident
National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:oru:diva-38904 (URN)
Available from: 2014-11-21 Created: 2014-11-21 Last updated: 2017-10-17Bibliographically approved

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