Testing for asymmetric information in the Brazilian market of automobile insurance

• Grant number: 11/21962-0
• Support Opportunities: Regular Research Grants
• Start date: February 01, 2012
• End date: January 31, 2013
• Field of knowledge: Applied Social Sciences - Economics - Industrial Economics
• Principal Investigator: Bruno Cesar Aurichio Ledo
• Grantee: Bruno Cesar Aurichio Ledo
• Host Institution: Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto (FEARP). Universidade de São Paulo (USP). Ribeirão Preto , SP, Brazil

Abstract

The empirical literature on asymmetric information in the automobile insurance market is far from a consensus. Some studies indicate the existence of relevant asymmetric information in the market, others do not. The most common criticisms are related to the testing methodology used, in particular a point called the attention of researchers: the difficulty in dealing with the endogeneity of the bonus system (clearly related to unobservable characteristics of the insuree that affect their risk). This project proposes a possible solution to the problem: the use of brokers' commission rate as an instrument of the bonus history. The argument is that the broker's commission rate is correlated with the bonus history (intuition: the higher the bonus history, the higher the switching cost of the insuree and as a consequence, higher commission rates charged). On the other hand, there is no correlation between the rates of commission and unobservable characteristics of the insuree.Using an extensive database developed by SUSEP, this paper will test the existence of information asymmetry in the Brazilian auto insurance using instrumental variables techniques. This work can provide technical support to guide regulatory policies to improve risk sharing in the insurance market. (AU)