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On Information and the Demand for Insurance
General Information
Title
On Information and the Demand for Insurance
Author
Amit Gandhi, Anya Samek and Ricardo Serrano-Padial
Publication Type
Conference paper
Outlet
American Economic Association Annual Meeting 2020
Year
2020
Abstract
New computing tools and big data are transforming the insurance industry. Insurers may now have more information about underlying risks than consumers do. We evaluate the individual and market equilibrium effects of this rising information asymmetry using an incentivized survey. We find that consumers are willing to pay higher premiums for insurance when there is uncertainty about underlying risks, which leads to a right-ward shift in demand for insurance. Importantly, we find that the information premium is negatively correlated with risk aversion, which leads to a selection effect. Individuals who are willing to pay more for insurance when underlying risk information is uncertain are not necessarily those who are most risk averse. We show that these effects can lead to substantial reductions in consumer welfare and induce insurers to selectively disclose information to consumers depending on their risk profile.