Associate Professor Aaron Hedlund Provides Insight Into Car Insurance on WalletHub

Aaron Hedlund
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Economics

Aaron Hedlund, associate professor of economics, provides insight into COVID-19's impact on car insurance and weighs in on setting premiums for certain demographics.

(Article originally appeared on WalletHub.) 

How do you think COVID-19 has affected consumer demand for car insurance?

If I had to speculate, I would surmise that COVID-19 has increased demand for car insurance simply because it has increased demand for car travel as people shift away (even if temporarily) from flying.

Is it fair for car insurance companies to consider gender or age when setting premiums?

I don't think fairness has much to do with it. Car insurance companies have the incentive to include any information they deem relevant to predicting actuarial risk. I can't speak to gender, but my sense is that there are clear differences in accident rates between younger vs. older/more experienced drivers. If car insurance companies were to not take that information into account, they would have to force one group of their customers (the statistically safer drivers) to cross-subsidize another group (the statistically less safe drivers), which would then present a market opportunity for a competitor car insurance company to swoop in and snatch away the lower-risk drivers by offering them lower premiums tailored to their safer risk profile.

Is it fair for car insurance companies to consider a driver’s occupation when setting premiums?

My answer here is the same as above. If there is a statistical relationship between occupation and driving risk, car insurance companies may choose to take such information into account. If no such meaningful link exists, then car insurance companies have no reason to do so and in fact would put themselves at a competitive disadvantage if they did for the same reasons as above.

Do you think car insurance companies are fair to college students?

The only way I could assess fairness is to take the premium differential that college students face relative to other drivers and compare that to the accident and loss rates that insurance companies grapple with for college students vs. other drivers. If those differentials are proportional to each other, then it signals that the market is working well, i.e. things are "fair" in the sense of premium differentials reflecting differences in risk. If those differentials don't match up, then something in the market is off one way or the other depending on which way the disparity goes.

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