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The Effect of the Introduction of a »Pay Per Use« Option within motor TPL insurance

Author

Listed:
  • Stefan Trappl

    (FHWien University of Applied Sciences of WKW)

  • Karl Zehetner

    (FHWien University of Applied Sciences of WKW)

  • Robert Pichler

    (FHWien University of Applied Sciences of WKW)

Abstract

In this paper the effects of the introduction of the so called “pay per use” -insurance products are examined. These products collect data of kilometers driven by policy holders. As a result of this data, policy holders can get a refund on the insurance-premium paid. Since there is a positive correlation between mileage and the risk of causing an accident the refund is granted to low-mileage drivers, so in theory the “pay per use” product is more attractive to low-mileage drivers than to long-distance drivers. The authors examine empirical evidence to find out whether or not it is mainly low-mileage-drivers who choose the “pay per use” product. Secondly, the authors examine whether there are other significant differences between characteristics of “pay per use” policy-holders and “traditional” policy- holders. Therefore a random sample of 4,000 car-insurance - clients (2,000 “pay per use” policy- holders and 2,000 “traditional” policy-holders) is reviewed. In addition the effects of the introduction of “pay per use” products are discussed, in case of a selection effect between low- and high -mileage drivers is observed.

Suggested Citation

  • Stefan Trappl & Karl Zehetner & Robert Pichler, 2014. "The Effect of the Introduction of a »Pay Per Use« Option within motor TPL insurance," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(1), pages 73-87, May.
    • Handle: RePEc:sgm:jbfeuw:v:1:y:2014:i:1:p:73-87
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    References listed on IDEAS

    as
    1. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    2. Alma Cohen, 2005. "Asymmetric Information and Learning: Evidence from the Automobile Insurance Market," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 197-207, May.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    4. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Insurance; Pay per Use; Pay as you Drive; Adverse Selection; Selection Effects;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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