Testing for Hidden Information and Action in Automobile Insurance Market

I test the presence of hidden information and action in the automobile insurance market using a data set from several Colombian insurers. To identify the presence of hidden information I find a common knowledge variable providing information on policyholder s risk type which is related to both experienced risk and insurance demand and that was excluded from the pricing mechanism. Such unused variable is the record of policyholder s traffic offenses. I find evidence of adverse selection in six of the nine insurance companies for which the test is performed. From the point of view of hidden action I develop a dynamic model of effort in accident prevention given an insurance contract with bonus experience rating scheme and I show that individual accident probability decreases with previous accidents. This result brings a testable implication for the empirical identification of hidden action and based on that result I estimate an econometric model of the time spans between the purchase of the insurance and the first claim, between the first claim and the second one, and so on. I find strong evidence on the existence of unobserved heterogeneity that deceives the testable implication. Once the unobserved heterogeneity is controlled, I find conclusive statistical grounds supporting the presence of moral hazard in the Colombian insurance market.

Grantor dc:publisher

Universidad del Rosario

Year dc:date

2009

Author dc:creator

• García Rubiano, Juan Pablo

• Insurance
• Adverse selection
• Moral hazard
• Empirical tests of contract theory
• Seguros de automóviles
• Seguros de responsabilidad civil
• Pólizas de seguros de automóviles
• Economía

Statement dc:rights

• info:eu-repo/semantics/openAccess

Licence

• http://creativecommons.org/licenses/by-nc-nd/2.5/co/

Language dc:language

spa

Identifier

TMEC 0004 2011
http://repository.urosario.edu.co/handle/10336/2416

OAI identifier oai:identifier

oai:repository.urosario.edu.co:10336/2416