*College of Business, Feng Chia University, No. 100 Wenhwa Rd., Taichung, Taiwan, R.O.C.
**Department of Insurance and Finance, National Taichung Institute of Technology, 129 Sec. 3, San-min Rd., Taichung, Taiwan, R.O.C.
Online published on 11 January, 2012.
Using a unique set of data on holders of automobile liability insurance issued by a large insurance firm based in Taiwan, this paper examines whether there is asymmetric information in the automobile insurance market. The task is particularly done by classifying policyholders either as beginners or experienced drivers based on their driving experience and analyzing the conditional coverage-claim correlation involving these two groups. According to the bivariate probit regressions and the two stages probit regressions, the empirical results suggest that, supporting only the experienced drivers, their choice of a higher insurance coverage is associated with more accident claims. However, results do not provide evidence of a positive correlation between the choice of insurance coverage and the occurrence of a claim in a subsample composed of beginner drivers. This paper provides strong and robust evidence that a policyholder who perceives more risk could be more knowledgeable about his choice of insurance coverage.
Automobile liability insurance, Asymmetric information, Beginners, Experienced drivers
