Explaining switching behavior: Consumer attention and choice in car insurance market

Abstract

This study investigates consumer search frictions and choices for Motor Own Damage insurance among vehicle lessees in Estonia. Using a consumer-level annual panel dataset from Estonia’s largest insurance broker that comprises policy and insurance offers for 2010–2018, we apply a two-stage discrete choice model (building upon Hortaçsu et al., 2017) to identify sources of consumer inertia by separating attention and choice decisions given the documented switches to new providers. Consumers choose from a set of pre-listed offers corresponding to the best alternatives available in the market. Our results demonstrate that strong inertia is driven by consumer inattention, with considerable heterogeneity in inattention across consumer groups. Consumers’ decisions to switch or stay with their current provider reveal substantial price elasticity and only a modest influence of brand preference. Our estimates are confirmed by multiple robustness checks.