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Practical applications of vehicle telematics

Economic analysis of insurance markets has consistently assumed that insurers are symmetrically informed about consumers’ risk types. However, in many situations, this assumption may not be correct. We examine welfare in competitive insurance markets when one insurer has superior information about consumer characteristics. Our study is particularly motivated by the development of Event Data Recorders (EDRs) which are capable of generating sensitive data related to the driving habits and risk-type of the individual automobile driver. EDRs provide data that can be a powerful predictor of the frequency and severity of automobile accidents. Without EDRs, insurance firms must rely on less refined estimates of expected losses which are based on age, gender, and other easily observable characteristics of the driver. With EDRs, insurers can have access to extremely good information about the driving characteristics of insured drivers. This improved information enables an insurer to differentiate between consumers in regards to their risk type. EDRs can thus substantially mitigate adverse selection, and may also be useful in addressing issues of moral hazard.2