A problem with using trackers to solve problems of asymmetric information in the car insurance market

Car Insurers Find Tracking Devices Are a Tough Sell
by: Leslie Scism
Jan 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Adverse selection, Asymmetric Information, Insurance

SUMMARY: Car insurers want to track people's driving habits to better assess their accident risk, but convincing customers to allow monitoring devices in their vehicles has been an uphill battle.

CLASSROOM APPLICATION: Students can evaluate the effect of tracking mechanisms, or usage-based insurance systems, (which measure speed, braking, driving times, roads traveled, and other characteristics of driving behavior) on the automobile industry, most notably insurance rates based on driving habits and the sorting of drivers by these habits. The article also notes the term adverse selection and how it is relevant to the insurance industry.

QUESTIONS: 
1. (Introductory) What is the relationship between credit history and cautious driving behavior? Should insurance rates be tied to credit history?

2. (Advanced) The article notes "adverse selection." Define the term. Why is it relevant to insurance markets?

3. (Advanced) The article notes "barrier to entry." What is the context in the article of the use of this term?

4. (Advanced) What is the relationship between whether an insurance company uses tracking devices in measuring driving behavior and the types of policyholders to company attracts?

5. (Introductory) Should drivers be charged by insurance companies by whether they drive on high-risk roads at high-risk times?

Reviewed By: James Dearden, Lehigh University