Buying Data From Consumers

Research Seminars

The Impact of Monitoring in US Auto Insurance

The authors of the paper presented in this MaCCI/EPoS Virtual IO Seminar study the impact of a voluntary monitoring program by a major U.S. auto insurer, in which drivers accept short-term tracking in exchange for potential discounts on future premiums. They acquire a detailed proprietary dataset from the insurer and match it with competitor price menus. They first quantify the degree to which monitoring incentivizes safer driving and allows more accurate risk-based pricing. They then model the demand and supply forces that determine the amount of information revealed in equilibrium: structural demand estimates capture correlations among cost and demand for insurance and for monitoring; a dynamic pricing model links the firm’s information on driver risk to prices. They find large profit and welfare gainsfrom introducing monitoring. Safer drivers self-select into monitoring, with those who opt in becoming 30% safer when monitored. Given resource costs and price competition, a data-sharing mandate would have reduced short-term welfare.