The relationship between firm size and screening in an automobile insurance market

This article modifies the Carlson and McAfee model of price dispersion to allow for screening. It is argued that only large insurers will be able to screen effectively and that they should insure fewer high-risk drivers and have lower loss costs as a result. We examine the relationship between firm size and loss costs using automobile insurance data for Alberta for the years 1978 through 1981. The relationship between cars insured per firm and loss costs per car insured is significant and is represented by a parabola, as expected, for four out of the five largest driver classes in Alberta.