Usage-based insurance, privacy costs, asymmetric information, welfare
The use of telematics in the automobile industry has been growing recently to resolve the problem of asymmetric information in the insurance market related to the identification of the type of a driver. This paper aims to study the impact of the introduction of usage-based insurance on the market participants taking into account the privacy costs associated with the installation of such a behaviour-monitoring device. We assume that UBI is offered as part of the contract to the agents and is voluntary to install. Our findings suggest that no matter how highly an agent values her privacy, there will always be some proportion of the low-type agents who register for UBI to receive full coverage at a higher premium. Moreover, the high-types are weakly worse-off with the introduction of UBI as they pay a higher premium for full coverage. The results of our analysis imply that UBI is Pareto-improving if it allows the company to serve a new market, in which the low-types were not being served initially, else it might be welfare decreasing.
Master of Arts
Major Research Paper