Thursday , February 27 2020
Home / Managerial Econ / Pay-How-You-Drive Insurance Works

Pay-How-You-Drive Insurance Works

Summary:
A new paper by Reimers and Shiller documents the effects of Pay-How-You-Drive (PHYD) insurance. The idea is to use telematics to monitor driver behavior and to reward better drivers with discounted premiums. While Progressive initiated monitoring driver behavior for insurance purposes, other companies are getting in on it too. Reimers and Shiller cleverly exploit the staggered rollout across states to observe company profitability and driver fatalities.First, they find that the first mover earns a profit boost. But this is temporary and dissipates with entry. That is, PHYD offers no sustainable competitive advantage to the first-mover. This seems to meet our expectations as there are few barriers to other insurers implementing PHYD systems. But  profit erosion with four or five firms also

Topics:
[email protected] (Michael Ward) considers the following as important: , ,

This could be interesting, too:

[email protected] (Luke Froeb) writes “There might be some unintended consequences,” she added.

[email protected] (Michael Ward) writes Adverse Selection into Privacy Protection

[email protected] (Michael Ward) writes Valentines Signals

[email protected] (Luke Froeb) writes China’s coming population collapse

A new paper by Reimers and Shiller documents the effects of Pay-How-You-Drive (PHYD) insurance. The idea is to use telematics to monitor driver behavior and to reward better drivers with discounted premiums. While Progressive initiated monitoring driver behavior for insurance purposes, other companies are getting in on it too. Reimers and Shiller cleverly exploit the staggered rollout across states to observe company profitability and driver fatalities.

First, they find that the first mover earns a profit boost. But this is temporary and dissipates with entry. That is, PHYD offers no sustainable competitive advantage to the first-mover. This seems to meet our expectations as there are few barriers to other insurers implementing PHYD systems. But  profit erosion with four or five firms also suggests that auto insurance markets are pretty competitive.

Second, they find that driver fatalities fall. PHYD could affect either the adverse selection problem (better drivers sign up) or the moral hazard problem (you drive better when it is rewarded). If it was just adverse selection, then good drivers drive no better and bad drivers drive no worse. They are just sorted into insurance plans more efficiently. But if it works on moral hazard too, drivers who sign up drive better and collectively we are likely better off because driving has become safer.

Third, by examining PHYD, Reimers and Shiller have documented one of the many ways that information technology, in this case telematics, is improving market efficiency and saving lives.

Leave a Reply

Your email address will not be published. Required fields are marked *