Underwriting information and insurers' profitability: Evidence from automobile physical damage insurance in Taiwan

Abstract

The asymmetric learning hypothesis describes that an insurer can earn a higher profit by possessing underwriting information on repeat customers that is not available to other insurers. This study investigates whether this advantage is still sustained under a complete information-sharing mechanism. We employ data on automobile physical damage insurance in Taiwan to analyze whether insurers still enjoy an information advantage for repeat customers and whether they earn higher profits on staying policies. The findings reveal that switching and repeat customers do not affect insurers' profitability, suggesting that insurers do not have an information advantage over repeat customers; therefore, a complete information-sharing mechanism can eliminate asymmetric information among insurers. Moreover, the availability of abundant underwriting information enables insurers to more accurately assess customers' risk levels, which increases insurers' profitability. Furthermore, the results indicate that the bonus-malus system does not effectively reduce risks associated with policyholders with high claim frequencies because the degree of the increase in premium is lower than the increase in claim amounts, which is attributable to institutional factors. Our study implies the necessity of designing a more effective bonus-malus system in addition to underwriting screening.