Do Insurance Companies Possess an Informational Monopoly? Empirical Evidence From Auto Insurance

Authors

  • Paul Kofman,

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    • Paul Kofman is with the Faculty of Economics and Commerce, Department of Finance, The University of Melbourne. Kofman can be contacted via e-mail: pkofman@unimelb.edu.au. Gregory P. Nini is with The Wharton School, University of Pennsylvania. Nini can be contacted via e-mail: greg30@wharton.upenn.edu. The authors thank Thomas Cipra and participants at the Financial Intermediation Research Society Conference on Banking, Corporate Finance, and Intermediation, and seminar participants at Victoria University Wellington, Maastricht University, and Tilburg University for comments on earlier versions of this article.
  • Gregory P. Nini

    Search for more papers by this author
    • Paul Kofman is with the Faculty of Economics and Commerce, Department of Finance, The University of Melbourne. Kofman can be contacted via e-mail: pkofman@unimelb.edu.au. Gregory P. Nini is with The Wharton School, University of Pennsylvania. Nini can be contacted via e-mail: greg30@wharton.upenn.edu. The authors thank Thomas Cipra and participants at the Financial Intermediation Research Society Conference on Banking, Corporate Finance, and Intermediation, and seminar participants at Victoria University Wellington, Maastricht University, and Tilburg University for comments on earlier versions of this article.

ABSTRACT

This article investigates the impact of policyholder tenure on contractual relationships in nonlife insurance markets. For a sample of auto insurance policies, we find that average risk decreases with policyholder tenure, but the effect is entirely due to the impact of observable information. We reject the hypothesis that the incumbent insurer is privately learning faster about quality of their policyholders. We highlight the importance of a public signal regarding policyholders' claims experiences and suggest alternative explanations for the unconditional relationships in the data.

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