Insurance Markets When Firms Are
Asymmetrically Informed: A Note
Jason Strauss and Aidan Hollis
University of Calgary
Presenting: Jason Strauss, Candidate, M.A. (Economics)
Previous Research
• Barros, P., 1993, Freedom of Service and
Competition in Insurance Markets: A Note,
Geneva Papers on Risk and Insurance.
• Crocker, K. J., and A. Snow, 1986, The
Efficiency Effects of Categorical Discrimination
in the Insurance Industry, Journal of Political
Economy.
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Event data recorders (EDRs), telematics, and
GPS systems
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EDRs enable the collection, storage, and
transmission of data to an insurer on how a
motor vehicle is operated for the purposes of
pricing an automobile insurance policy.
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Patents
• Progressive Casualty Insurance Company
– U.S. Patent Nos. 5,797,134 and 6,064,970 and 6,868,386.
– Canadian Patent Nos. 2,494,638, 2,344,781, and 2235566
– UK Patent Application
LICENSEES:
• Aviva Canada Inc.
• Norwich Union Insurance Limited, (UK)
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Assumptions
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Assumptions
• Only one insurer is well-informed.
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Assumptions
• Only one insurer is well-informed.
• Consumers do not know their risk-type.
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Research Question
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Research Question
• What are the welfare effects of asymmetrically
informed insurers?
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Research Question
• What are the welfare effects of asymmetrically
informed insurers?
– If insurers can separate low and high risk
consumers with a menu of contracts.
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Research Question
• What are the welfare effects of asymmetrically
informed insurers?
– If insurers can separate low and high risk
consumers with a menu of contracts.
– If insurers cannot separate low and high risk
consumers with a menu of contracts.
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Welfare Effects
Scenarios:
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Welfare Effects
Scenarios:
• If insurers can separate risks
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Welfare Effects
Scenarios:
• If insurers can separate risks
• If insurers cannot separate risks
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Welfare Effects
Scenarios:
• If insurers can separate risks
– Welfare Effects are Positive
• If insurers cannot separate risks
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Welfare Effects
Scenarios:
• If insurers can separate risks
– Welfare Effects are Positive
• If insurers cannot separate risks
– Consumer Welfare Decreases
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Welfare Effects
Scenarios:
• If insurers can separate risks
– Welfare Effects are Positive
• If insurers cannot separate risks
– Consumer Welfare Decreases
– Overall Welfare within the R&S world is unchanged
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Welfare Effects
Scenarios:
• If insurers can separate risks
– Welfare Effects are Positive
• If insurers cannot separate risks
– Consumer Welfare Decreases
– Overall Welfare within the R&S world is unchanged
– Well-informed insurer’s profits equal loss in consumer surplus
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Welfare Effects
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Welfare Effects
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Conclusion
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Conclusion
• The welfare effects depend on whether
insurers can separate consumers:
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Conclusion
• The welfare effects depend on whether
insurers can separate consumers:
– If they can, the welfare effects are positive.
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Conclusion
• The welfare effects depend on whether
insurers can separate consumers:
– If they can, the welfare effects are positive.
– If they cannot, consumer surplus decreases but
overall welfare is unchanged, well-informed
insurer gains positive profits.
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Conclusion
• The welfare effects depend on whether
insurers can separate consumers:
– If they can, the welfare effects are positive.
– If they cannot, consumer surplus decreases but
overall welfare is unchanged, well-informed
insurer gains positive profits.
• When the demand for “driving” is considered,
EDR technology could have a negative effect
on welfare, but not necessarily.
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Conclusion
• The welfare effects depend on whether
insurers can separate consumers:
– If they can, the welfare effects are positive.
– If they cannot, consumer surplus decreases but
overall welfare is unchanged, well-informed
insurer gains positive profits.
• When the demand for “driving” is considered,
EDR technology could have a negative effect
on welfare, but not necessarily.
• Also, what about privacy? (the topic of our 2nd
paper)
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Welfare Effects
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