Privacy concerns in insurance markets: Implications for market equilibria and customer utility

Abstract

We analyze insurance market outcomes and customer utility under asymmetric information when customers have heterogeneous privacy concerns and access to a screening technology that permits their private information to be revealed. If the market outcome without the technology is of the Rothschild–Stiglitz type, so too is the market outcome with the technology for those who do not submit to the screening technology and thus retain their private information. Low-risk customers who reveal their private information are better off and those who do not reveal their risk type are no worse off, resulting in a Pareto improvement. If, however, the market outcome without the technology is of the Wilson–Miyazaki–Spence type, the market may no longer exhibit cross-subsidies after the screening technology is introduced. In this case, low-risk customers who reveal their risk type are better off, but this is at the expense of those who do not reveal their risk type, who are worse off due to intensified adverse selection. The negative externality on those who do not reveal their risk type can outweigh the utility gains of those low-risk customers who do reveal their risk type, resulting in lower expected welfare. In this case, a privacy law would improve expected welfare.