Provider-induced Asymmetric Information in the Insurance Market

1. Provider-induced Asymmetric Information in the Insurance Market Larry Y. Tzeng Jennifer L. Wang Kili C. Wang Jen-Hung Wang

2. Asymmetric information— • Adverse selection • Moral hazard There is significantly positive conditional correlation between risk and coverage. • Risk—claim • Coverage—high versus low

3. --Most literatures focus on the asymmetric information between insured and insurer. --Few literatures focus on the asymmetric information caused by provider in health insurance --This paper focus on the asymmetric information caused by provider in automobile insurance of Taiwan

4. “Provider” in this paper: • Dealer-owned agent (DOA)—who sold automobile as well as automobile insurance, meanwhile he also owned the repair house. • More than 40% of automobile insurance policies are sold through DOA.

5. In year 2000

6. Why provider induce more sever asymmetric information? Adverse selection— • DOA sold larger percentage of high coverage contract • The commission incentive for DOA to sell high coverage • “obtain better deal” motive for insured to purchase high coverage • DOA induced greater number of high risk drivers • “Higher expected repair revenue” incentive for DOA • Immune form premium penalty for high risk insured • Get “better car repair service” for high risk insured

7. Moral hazard— High coverage policies through DOA result in more claim • DOA clear about who has higher coverage can cover higher loss • DOA owned more information about car damage caused by accident • Insurer audit DOA less (insurer tolerate DOA more)

8. Our hypothesis: Automobile insurance sold through DOA suffers more severe problems of asymmetric information

9. Empirical methodologies • Chiappori and Salanie’s (2000) approach --residual correlation from two probit regression • Approach similar to Dionne, Gourieroux & Vanasse (2001) --two stage method

10. Chiappori and Salanie’s (2000) approach and is the correlation coefficient of Predict:

11. A robust test let when ,and when Predict: should be significantly positive

12. Approach similar to Dionne, Gourieroux & Vanasse (2001) (a) estimate the occurrence of claim in first stage (b) estimate the choice of coverage in first stage

13. Predict: is significantly positive is significantly positive

14. Empirical Results • The asymmetric information do exist in automobile insurance market of Taiwan • The asymmetric information problems in insurance written by DOA are more sever than those through non-DOA channels • From Chiappori and Salanie’s (2000) approach • From robust test • From Approach similar to Dionne, Gourieroux & Vanasse (2001)

15. Thank you ! All your comments are welcome !