Information in Insurance Markets: When Less is More

Many studies show that asymmetric information exists in insurance markets, yet there is little consensus on the e↵ectiveness of interventions in these markets. This article provides empirical evidence that improving information about risk is not always welfare-improving. I show how the theoretical e↵ect of risk-rating can depend on whether the market is adverselyor advantageously-selected. I then estimate a structural model of insurance choice and reckless behavior to show that in the advantageously-selected U.S. automobile insurance market, riskrating induces high-risk drivers to drop coverage, creating a negative externality and social welfare loss. Community rating improves welfare despite increasing asymmetric information.