Clever Way to Combat Moral Hazard

Business Week has a short item about auto insurance companies, like Safeco, offering a GPS-based device that is installed in autos to record information about driving habits. This is one tool that insurance companies can use to combat the moral hazard problem (once you buy insurance, you may engage in more reckless behavior knowing you are covered in the case of an accident).

So, what's so interesting about the solution discussed in the article? First, the product is targeted at teen drivers, and the insurance company doesn't review the information itself. Instead it gets someone else to do its monitoring for them - parents. The system alerts parents by email or cell phone if their teens' speed exceeds a certain limit. Clever approach (similar to this post).

Second, and even more impressive, is that the company charges for the service. The insurance company is charging its customers to engage in an activity that will reduce the insurance company's costs - teens who know they are being monitored will speed less leading to fewer accidents. That's a sweet deal for the company.