Is the market classification of risk always efficient? evidence from German third party motor insurance

This paper studies the empirical effects of risk classification in the mandatory third-party motor insurance of Germany following the European Union’s directive to de-regulate insurance tariffs of 1994. We find evidence that inefficient risk categories had been selected while potentially efficient information was dismissed. Risk classifi-cation did generally not improve the efficiency of contracting or the composition of insureds in this market. These findings are partly explained by the continuing exis-tence of institutional restraints in this market such as compulsory fixed coverage and unitary owner insurance.