Insurance Markets When Firms Are Asymmetrically Informed: A Note

1. Insurance Markets When Firms Are Asymmetrically Informed: A Note Jason Strauss and Aidan Hollis University of Calgary Presenting: Jason Strauss, Candidate, M.A. (Economics)

2. 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.

3. Event data recorders (EDRs), telematics, and GPS systems

4. 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.

5. 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)

8. Assumptions

9. Assumptions • Only one insurer is well-informed.

10. Assumptions • Only one insurer is well-informed. • Consumers do not know their risk-type.

11. Research Question

12. Research Question • What are the welfare effects of asymmetrically informed insurers?

13. 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.

14. 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.

18. Welfare Effects Scenarios:

19. Welfare Effects Scenarios: • If insurers can separate risks

20. Welfare Effects Scenarios: • If insurers can separate risks • If insurers cannot separate risks

21. Welfare Effects Scenarios: • If insurers can separate risks • Welfare Effects are Positive • If insurers cannot separate risks

22. Welfare Effects Scenarios: • If insurers can separate risks • Welfare Effects are Positive • If insurers cannot separate risks • Consumer Welfare Decreases

23. 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

24. 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

25. Welfare Effects

26. Welfare Effects

27. Conclusion

28. Conclusion • The welfare effects depend on whether insurers can separate consumers:

29. Conclusion • The welfare effects depend on whether insurers can separate consumers: • If they can, the welfare effects are positive.

30. 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.

31. 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.

32. 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)

35. Welfare Effects