Price Dispersion in an Automobile Insurance Market

Abstract

From automobile insurance data for Alberta over the period 1974-81, we find thatpremiums are highly correlated across driver classes in a given year, but that premiums for a given driver class are not correlated over a period of more than 5 years. Firms' relative market shares among drivers over age 25 and married males under 25 are inversely related to their deviations from the mean premiums.In these driver classes, the variance of real premiums decreases with the numberof firms in the market and increases with the real loss cost per car insured and the number of cars insured. From these results we conclude that the price dispersion in automobile insurance in Alberta is based on costly consumer search.