Estimating the cost caused by asymmetric information: A case study of automobile insurance sector in Turkey

Asymmetric information, a market failure, is frequently seen in the insurance sector in which uncertainty and risk factors are important. Individuals pass on their future risks to the insurance company by purchasing a policy in the automobile insurance sector, which is one of the non-life insurance branches. The insurance company is the party that purchases the risk. The insurance company determines the policy price with risk price. While determining the policy price, insurance companies rely on the information they can access about the automobile and its owner. Insurance companies often fail to distinguish between high and low-risk car owners and charge an average price. While this price imposes a cost on individuals with a low level of risk, the insurance company bears the cost of individuals with a high level of risk. The first aim of this study is to test the existence of asymmetric information in the Turkish automobile insurance sector. The second aim is to estimate the cost in the presence of asymmetric information. The study examines car and traffic insurance, which are approximately 97% of the automobile insurance sector in terms of premium production and compensation payment. A questionnaire is conducted in three provinces (Istanbul, Ankara, and Izmir) where most of Turkey's car insurance and traffic insurance policies are issued. Data of 408 policyholders were obtained with the convenience sampling method. Policy prices for car own damage and traffic insurance were estimated through the hedonic pricing model, one of the price estimation methods. Based on multiple regression analyses, it could be suggested that asymmetric information in both car and traffic insurance exists. Moreover, the causes of asymmetric information are examined. It is found that five factors in car insurance and six factors in traffic insurance are determinants of asymmetric information. It is estimated that the cost caused by asymmetric information is 60% and 65,3% of the policy value in car and traffic insurance, respectively. Policyholders mainly bear the cost of asymmetric information. Both the existence of asymmetric information and its cost to policyholders necessitate regulatory function in this area of interest. Based on the findings it could be suggested that if the government regulates car and traffic insurance sectors more, asymmetric information can be minimized.