Advantageous Selection, Moral Hazard, and Insurer Sorting on Risk in the U.S. Automobile Insurance Market.

This study quantifies the role of private information in automobile insurance policy choice using data on subjective beliefs, risk preference, reckless driving, the respondent's insurer and insurance policy characteristics merged with insurer-specific quality ratings distributed by independent organizations. We find a zero correlation between ex post accident risk and insurance coverage, reflecting advantageous selection in policy choice offset by moral hazard. Advantageous selection is partly attributable to insurer sorting on consumer attributes known and used by insurers. Our analysis of insurer sorting reveals that lower-risk drivers on attributes observed by insurers obtain coverage from insurers with higher-quality ratings.