Efficiency in Insurance Market with Big Data

Category: Finance Brown Bag Seminar
When: 30 January 2019
, 14:00
 - 15:00
Where: HoF E.20 ("DZ Bank")
Speaker: Sergio Santoro

Authors: Sergio Santoro (Bank of Italy) and Marco Cosconati (Bank of Italy)

Title: Efficiency in insurance market with big data

Abstract: We examine a monopolistic insurance market in which Big (telematic) data recorded by telemonitoring devices allow the insurer to learn about otherwise unobservable ex-ante risk and customize insurance rates. We show that both a standard and a dynamic telematic contract - premium is contingent on data about actual behaviour - co-exist in equilibrium. We employ a unique panel dataset containing rich information on the contracts underwritten in the Italian auto insurance market to i) show that real life contracts are consistent with the prediction of the theory ii) infer the sign of selection into the telematic contract. Our empirical results indicate that telematic contracts greatly ameliorate the moral hazard problem, although advantageous selection and dynamic inefficiencies reduce welfare.