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Will driving data lead to better insurance pricing?

Summary:
Chapters 19 and 20 talks about the problems of adverse selection and moral hazard caused by asymmetric info.  This makes car insurance difficult to buy because you know whether you drive carefully, but the insurance company does not.  Better information, e.g., by letting your insurance company monitor your driving via your cell phone location, will reduce prices for good drivers and raise them for bad ones.  In lieu of good information about driving, insurance companies use proxies like credit score: those with higher credit scores pay lower car insurance rates.  Now Allstate is leading an industry-wide group who wants track your driving to determine your insurance rates: With telematics, insurers monitor policyholders’ driving behaviors either through smartphone applications or devices

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 Chapters 19 and 20 talks about the problems of adverse selection and moral hazard caused by asymmetric info.  This makes car insurance difficult to buy because you know whether you drive carefully, but the insurance company does not.  Better information, e.g., by letting your insurance company monitor your driving via your cell phone location, will reduce prices for good drivers and raise them for bad ones.  

In lieu of good information about driving, insurance companies use proxies like credit score: those with higher credit scores pay lower car insurance rates.  

Now Allstate is leading an industry-wide group who wants track your driving to determine your insurance rates:

With telematics, insurers monitor policyholders’ driving behaviors either through smartphone applications or devices embedded in their vehicles. Insurers slice the tracking data to tailor individual rates. 
While a switch could be unsettling to many people with privacy concerns, it would hold out the possibility of lower rates for vehicle owners who are excellent drivers or don’t drive that much, and who might now be overpaying for the risk they pose.

Bottom line:  delivering this kind of info to insurance companies reduces the information asymmetry (drivers know more about their expected risks than do insurance companies) which can mitigate the effects of adverse selection and moral hazard.  

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