The Impacts of Telematics on Competition and Consumer Behavior in Insurance

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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.

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