Asymmetric Information in Insurance Markets: Evidence from China Automobile Insurance Market

This paper examines whether voluntary and compulsory insurance markets are both influenced by asymmetric information. Using an individual data set from China automobile insurance market, this paper arrives at two conclusions as follows. First, policyholders choosing higher insurance coverage are associated with more accidents in automobile damage insurance market, this coverage-risk correlation turns to be stronger for experienced drivers than beginners. Second, such a positive systematic relationship between insurance coverage and risk occurrence is also found in automobile third-party liability insurance market while this correlation is weaker compared to automobile damage insurance market. Empirical results are consistent with the prediction of asymmetric information models.