More for less? Puzzling selection effects in the insurance market

Edmund S Cannon, GP Cipriani, Katia Bazar-Rosen

Research output: Contribution to journalArticle (Academic Journal)peer-review

1 Citation (Scopus)
240 Downloads (Pure)

Abstract

We document a large and persistent anomaly in the UK car insurance market over the period 2012-13: insurance companies charged a higher premium for third-party (liability) insurance than comprehensive insurance (which includes third-party). Furthermore, some companies charged higher premiums for comprehensive policies with larger deductibles. In contrast with current theories of adverse or propitious selection, our evidence suggests both that consumers are too confused or too poorly informed to arbitrage between policy types and that sellers of car insurance do not implement the incentive-compatibility constraints at the heart of consumer demand theory. This particular insurance market is much less sophisticated than that characterized by modern microeconomic theory.
Original languageEnglish
Pages (from-to)879-897
Number of pages19
JournalOxford Economic Papers
Volume68
Issue number4
Early online date2 Jun 2016
DOIs
Publication statusPublished - Oct 2016

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