Proprietary Data, Competition, and Consumer Effort: An Application to Telematics in Auto Insurance

Abstract

Firms are increasingly able to monitor and collect proprietary data on their customers' behaviors, raising concerns among antitrust authorities that incumbents may use such data to soften competition. Focusing on auto insurance monitoring programs which offer tailored discounts to consumers driving safely, we examine the impact of proprietary data collection on incumbent profits. We find that incumbents' profits initially increase but are eroded by competition from other firms offering similar programs. We further find that these monitoring programs reduce fatal accidents. Yet the benefits are short-lived. Incumbents, who do not necessarily internalize the full costs of accidents, typically monitor their customers only temporarily. Thus, regulation incentivizing permanent monitoring may improve welfare by reducing moral hazard.

Privacy and personal data collection with information externalities

“…Progressive's Snapshot program and Allstate's Drivewise Mobile App are the real-world examples of this kind. Reimers and Shiller (2018) provides many examples of telematics in auto insurance.…”

Pricing Metrics and the Importance of Minimum and Billing Increments

“…Michelin follows the same path for truck fleets and charges a fee on its tires for each mile driven (Ramanujam and Tacke 2016, p. 81). Similarly, insurance firms have begun using telematics devices to offer “pay how you drive” auto insurance, a usage-based insurance concept that assesses premiums on the basis of time of usage, distance driven, and driving behavior (Reimers and Shiller 2018).…”

Do Digital Platforms Reduce Moral Hazard? The Case of Uber and Taxis

“…Duflo et al (2012) have shown that incentive pay enabled by tech-aided monitoring can raise teachers' attendance rate and consequently student performance. Reimers et al (2018) have found that insurance companies' monitoring technologies reduce driver moral hazard and fatal accidents. Sudhir and Talukdar (2015) have illustrated the role of IT in inducing business transparency by showing more corrupt businesses resist IT adoption more.…”