Empirical Evidence on Relationships in Insurance Markets

This paper investigates the value of relationships in insurance markets. Theory predicts that policyholder tenure should be positively related to average profitability and negatively related to average risk, as an incumbent insurer exploits its information advantage to strategically retain a higher fraction of better risks at increasingly unfair prices. For a sample of Australian insurance policies, we find that unconditional average risk does decrease with policyholder tenure, but the effect is nearly entirely due to the impact of observable information. This suggests that the incumbent insurer is not learning any faster about their policyholders than its competitors.