May 2014

IZA DP No. 8172: Surprising Selection Effects in the UK Car Insurance Market

Edmund Cannon, Giam Pietro Cipriani, Katia Bazar-Rosen

published in: Oxford Economic Papers, 2016, 68 (4), 879-897

We document a large and persistent anomaly in the UK car insurance market over the period 2012-13: insurance companies charged a higher premium for third-party (liability) insurance than comprehensive insurance (which includes third-party). Furthermore, some companies charged higher prices for comprehensive policies with larger deductibles. This evidence suggests both that consumers are too confused or too poorly informed to arbitrage and that sellers of car insurance do not 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.