Satisfactory Essays
Usage based insurance (UBI) is a type of insurance that has come into recent popularity whereby the cost of insurance is contingent on the number of kilometers driven, the time of day, driving behavior and place.1 Desjardins Insurance argues that UBI is a risk free program that can only bring benefits to the consumers.2 Nevertheless, this paper will argue that Desjardins and auto-insurance companies are using the car-tracking device to increase the amount of information they have to make appropriate policies, that will correct the adverse selection and the moral hazard problem they are currently facing. However, this plan will not work since the creation of UBIs will intensify the adverse selection process rather than eliminate it, and pose as a disadvantage for some consumers.
Desjardins’ Current Insurance Problems
Adverse Selection Problem:
Desjardins main insurance problem is adverse selection. Adverse selection occurs when there are stronger incentives for “bad” types of a product to be involved in a transaction than “good” types of product.3 This is seen with any type of insurance, where those who need it more, high types, will buy it. However, this is not beneficial to insurance companies since they will be unable to write policies for the consumers they want to have, low types. Since they don’t know everyone’s true risk, insurance companies will charge higher premiums for everyone to compensate for when the high types require help. This will result in low types, leaving insurance companies and, could result in the insurance market collapsing. Insurance companies believe that UBI could work well since the car tracking device would collect data on the information needed to separate the low types from the high types, allowin...

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...riskier drivers taking standard insurance and low types taking UBI. However, through this self-sorting the insurance company can increase the premiums for the standard policy since they believe the people who would opt into that when there is an alternative must be risky drivers. This would further induce safer drivers to choose UBI worsening the adverse selection problem.
Although, Desjardins provides quality arguments for their desire to use a car tracking device to correct the insurance problems they are currently facing, it can be seen that it would do more harm than good. The car tracking device would result in an increased adverse selection problem, since those not opting into the program will be considered riskier drivers and have to pay a more expensive premium. Therefore, Lindhardsen of Desjardins is mistaken, money can be lost with this program
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