Testing for Information Asymmetry in Liability Coverage in China's Automobile Insurance Market

The existence of information asymmetry in automobile insurance market has been studied extensively, yet the previous work mainly focus on different characteristics of insureds, and less frequently on different types of claims. We make use of a unique and complete dataset, which enable us to test for information asymmetry across different lines of coverage, i.e. claims for liability coverage versus physical damage (collision) coverage, and to further compare degree of information asymmetry across different types of liability claims, i.e. those with bodily injury versus those with only property damage. We find that the degree of information asymmetry is the highest in liability claim with bodily injury, followed by liability claim with only property damage. And the claim in physical damage (collision) coverage is the least exposed to information asymmetry problem. These results suggest revision for a better pricing mechanism for underwriting and claim adjusting in automobile insurance policy in China.