Friday, August 9, 2013

Speeding Ticket Insurance

Anticipate adverse selection and moral hazard.
Hat tip: Brandon Vanderford

9 comments:

  1. This goes against the underlying principles of the insurance mechanism. Insurance is designed to cover losses/events that are fortuitous, or unforseen, from the insured's viewpoint at the time of the loss/event. This "speeding insurance" incentivizes the driver to be careless (morale hazard) and intentionally drive at a speed over the legal limit (moral hazard). An insurance company will not be able to charge an accurate rate to make a profit in this case. Adverse selection (drivers that speed will likely purchase the insurance) is particularly inherent in a case like this. It will ultimately prevent the law of large numbers from achieving its desired effect. The premiums of the low-risk drivers will not be enough to offset the losses of the high-risk drivers. I just hope this company is not dumb enough to also offer the Auto Insurance (property damage/legal liability) as well!!!

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  2. In other words, I hope they are not trying to capitalize on economies of scope in this case!

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  3. With my vast knowledge of receiving speeding tickets, they normally range from $150-200. The premium to get mass consumption of the insurance would have to be too low to make the venture profitable long-term.

    I agree with Steele, not viable.

    PS: Nice work using "economies of scope".

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  4. This comment has been removed by the author.

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  5. For someone to buy “Speeding Ticket Insurance” they would have to be either risk-averse, high-risk, or both. Speeding Tickets cost approx. between $150-200. That is a low price for someone that has the money in their budget to pay for additional insurance.

    If the customer is risk-averse, then they will place additional value on the knowledge that they have the insurance and are not at risk of having to pay a speeding ticket. That makes the insurance worthwhile for them, even though they will most certainly pay more over time for the insurance than they would for a speeding ticket.

    If the customer is high-risk, then the insurance is worth more to them than the average customer because the chances are high that they will use it. This type of customer raises the premiums for all customers unless the company is able to screen the customers to determine which group they fall into, then charge them accordingly.

    Either way, the insurance company is not going to put themselves in a position to lose, money, so for $150-$200, the average driver will not find this insurance worthwhile.

    References:

    Froeb, L.M., McCann, B.T., Shor, M., Ward, M.R. (2014) Managerial Economics: A problem solving approach. Third Edition. South-Western Cengage Learning: Mason.

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  6. For someone to buy “Speeding Ticket Insurance” they would have to be either risk-averse, high-risk, or both. Speeding Tickets cost approx. between $150-200. That is a low price for someone that has the money in their budget to pay for additional insurance.

    If the customer is risk-averse, then they will place additional value on the knowledge that they have the insurance and are not at risk of having to pay a speeding ticket. That makes the insurance worthwhile for them, even though they will most certainly pay more over time for the insurance than they would for a speeding ticket.

    If the customer is high-risk, then the insurance is worth more to them than the average customer because the chances are high that they will use it. This type of customer raises the premiums for all customers unless the company is able to screen the customers to determine which group they fall into, then charge them accordingly.

    Either way, the insurance company is not going to put themselves in a position to lose, money, so for $150-$200, the average driver will not find this insurance worthwhile.

    References:

    Froeb, L.M., McCann, B.T., Shor, M., Ward, M.R. (2014) Managerial Economics: A problem solving approach. Third Edition. South-Western Cengage Learning: Mason.

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  7. Insurance companies are clearly identifying that there are two types of consumers: defensive drivers (low-risk) and irresponsible drivers (high-risk). The critical aspect of adverse selection is to anticipate it and protect yourself against it. In NYS, insurance rates are based upon the company's underlying costs, which include the number of claims and the severity of those claims. It is also dependent on traffic patterns, population demographics, and the cost of goods and services contribute to insured cost variations. NYS insurance companies effectively use screening to identify which high-risk consumers they should sell insurance policies at a higher rate. In this case, the insurance company protecting itself by attempting to get the consumer to signal that they are risky drivers. If a consumer answers the Ad, they are announcing that they are risky drivers.

    The moral hazard here is straight forward; risky drivers will view the insurance as: if your tickets are already paid for, then you don’t have to worry about paying for them and as a result will drive more risky. Once the driver has the protection of the company paying the tickets their behavior changes and hidden actions arise.

    http://www.dfs.ny.gov/consumer/faqs/faqs_auto.htm

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial Economics: A problem Solving Approach. United States of America: South-Western Cengage Learning.

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