Cream Skimming and Technological Innovations in Automobile Insurance Market
-
Yoichiro Fujii
and
Shuhei Nishizawa
Abstract
This study examines the effect of telematics devices on the automobile insurance market. Automobile insurance using these devices is marketed as pay-how-you-drive (PHYD) automobile insurance. Insurers can directly monitor the insured’s vehicle for risky driving behaviors such as speeding. Some of insureds receive discounts on their premiums for driving more cautiously. On the other hand, accumulating the insured’s driving skills, insurers may be able to only sign up insureds with low accident rates, widely known as cream skimming. By applying Hodgson (2014. “Adverse Selection in Health Insurance Markets: A Classroom Experiment.” The Journal of Economic Education 45 (2): 90–100), we tested whether PHYD programs makes it easier for insurers to contract with low-risk drivers. Repeated cream skimming suggests that only high-risk drivers remain in the market and a residual market cannot be established, which could lead to adverse selection and market failure in the absence of any regulations. However, the experiment revealed that low-risk but highly risk-averse subjects tend to dislike the fluctuation in premiums by enrolling in PHYD programs. The results could be effective in future regulatory construction.
Funding source: Japan Society for the Promotion of Science
Award Identifier / Grant number: 17K03637
Award Identifier / Grant number: 21K01393
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Articles in the same Issue
- Frontmatter
- Featured Articles (Research Paper)
- Balancing Innovation and Profitability: Technological Diversification in Iran’s Insurance Industry
- Medical Insurance Contribution and Firm-Level Total Factor Productivity
- Cream Skimming and Technological Innovations in Automobile Insurance Market
- A Study on the Current Bonus–Malus System in the Moroccan Automobile Insurance Market
Articles in the same Issue
- Frontmatter
- Featured Articles (Research Paper)
- Balancing Innovation and Profitability: Technological Diversification in Iran’s Insurance Industry
- Medical Insurance Contribution and Firm-Level Total Factor Productivity
- Cream Skimming and Technological Innovations in Automobile Insurance Market
- A Study on the Current Bonus–Malus System in the Moroccan Automobile Insurance Market
