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Testing for Asymmetric Information in Automobile Insurance Market (Case Study of an Iranian Insurance Company)

Sedaghatkish, Nazanin | 2017

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 49872 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Rahmati, Mohammad Hossein; Vesal, Mohammad
  7. Abstract:
  8. Presence of asymmetric information is an important source of reducing insurance companies’ efficiency and increasing damage to premium ratio. In this research, we test the conditional independence of the choice of better coverage and the occurance of an accident, where “conditional” means conditional on all variables observed by the insurer. We use two parametric methods: a pair of probits and a bivariate probit model. The data includes 178390 third party and 46633 hull policies and their damage data for individual automobiles during 2013 to 2016 which covers all observations of the insurance company. Both third party and hull insurance policies have the option of adding extra coverage, so we could define extra coverage in different forms and test the correlation in third party data, hull data and the merged one. All our tests consistently give us evidence against the presence of asymmetric information. However, in subsamples which have the same kind of third party coverage (legal or extra), and the related dummy variable in probit models is defined based on having hull policy or not, we find evidence for the presence of asymmetric information in these samples
  9. Keywords:
  10. Asymmetric Information ; Moral Hazard ; Adverse Selection ; Automobile Insurance ; Third Party Insurance ; Positive Correlation Test

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