Template-Type: ReDIF-Paper 1.0

Author-Name:  Lilia Filipova
Author-X-Name-First: Lilia
Author-X-Name-Last: Filipova

Title: Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard

Abstract: This paper considers moral hazard in insurance markets when voluntary
monitoring technologies are available and insureds may choose the precision of
monitoring. Also privacy costs incurred thereby are taken into account. Two
alternative contract schemes are compared in terms of welfare: (i) monitoring
conditional on the loss with only the insurance indemnities based on the moni-
toring data, and (ii) unrestricted monitoring with both the premiums and the
indemnities depending on the data. With any contract scheme some monitor-
ing will be optimal unless the privacy costs increase too fast in relation to the
precision of the monitoring signal. In the benchmark situation (without pri-
vacy costs) relying completely on both signals (monitoring and the outcome)
informative of effort (ii) maximizes welfare. In the presence of privacy costs,
the contract with conditional monitoring (i) might dominate the contract which
fully includes the outcome and the monitoring signal into the sharing rule (ii).
Apart from the direct effect of restricting privacy costs only to the state of loss,
there are also an additional indirect incentive and a risk-sharing effect with
this contract. Letting the individuals choose the precision of the monitoring
technology at the time they reveal the data (ex post) is ine±cient with either
contract scheme.
Length:  39 pages
Creation-Date:  2007-06
File-URL: http://www.bgpe.de/texte/DP/026_filipova.pdf
File-Format: Application/pdf
File-Function: First version, 2007
Number: 026
Classification-JEL: D82, G22
Keywords: moral hazard, conditional monitoring, value of information, privacy
Handle: RePEc:bav:wpaper:026_filipova