Edmund Cannon (University of Bristol)

“Surprising selection effects in the UK car insurance market”

Abstract

We document a large and persistent anomaly in the UK car insurance market over the period 2012-13: insurance companies charged higher premiums for third-party (liability) insurance than comprehensive insurance (where the latter includes third-party). In addition, some companies charged higher prices for comprehensive policies with larger deductibles. This evidence suggests that both consumers are either too confused or too poorly informed to arbitrage and that sellers of car insurance do not understand or implement the incentive compatibility constraints at the heart of the adverse-selection model of insurance. This particular insurance market is much less sophisticated than that characterised by modern microeconomic theory.