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Advantageous Selection, Moral Hazard, And Insurer Sorting On Risk In The U.S. Automobile Insurance Market

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  • Patricia A. Robinson
  • Frank A. Sloan
  • Lindsey M. Eldred

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

  • Patricia A. Robinson & Frank A. Sloan & Lindsey M. Eldred, 2018. "Advantageous Selection, Moral Hazard, And Insurer Sorting On Risk In The U.S. Automobile Insurance Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(2), pages 545-575, June.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:2:p:545-575
    DOI: 10.1111/jori.12170
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    Cited by:

    1. Alois Geyer & Daniela Kremslehner & Alexander Muermann, 2020. "Asymmetric Information in Automobile Insurance: Evidence From Driving Behavior," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(4), pages 969-995, December.
    2. Anna Jędrzychowska, 2022. "A Bridge Life Insurance for Households—Diagnosis and Motives," Risks, MDPI, vol. 10(4), pages 1-21, April.
    3. Casper H. de Jong, 2021. "Risk classification and the balance of information in insurance; an alternative interpretation of the evidence," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(4), pages 445-461, December.
    4. Jing Jian Xiao & Chunsheng Tao, 2020. "Consumer finance/household finance: the definition and scope," China Finance Review International, Emerald Group Publishing Limited, vol. 11(1), pages 1-25, June.

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