The Impacts of Telematics on Competition and Consumer Behavior in Insurance

Abstract

Recent technological innovations allow insurance providers to closely monitor and collect detailed data on their customers’ behaviors. Such innovations offer potential benefits by mitigating moral-hazard problems but may provide the incumbent with a lasting first-mover advantage, which may harm consumers. We investigate these outcomes in the context of pay-how-you-drive (PHYD) auto insurance, which offers tailored discounts to drivers monitored by telematics devices. We exploit the staggered entry of PHYD insurance across states and insurers in a difference-in-differences framework. While innovating firms experience initial profit increases, the profits are eroded by entry, which suggests that this innovation does not raise novel antitrust concerns. Furthermore, we find a meaningful impact of PHYD programs on fatal car accidents. Our findings are consistent with impacts implied by canonical theoretical models.