Academic journal article Journal of Risk and Insurance

Are Green Car Drivers Friendly Drivers? a Study of Taiwan's Automobile Insurance Market

Academic journal article Journal of Risk and Insurance

Are Green Car Drivers Friendly Drivers? a Study of Taiwan's Automobile Insurance Market

Article excerpt

INTRODUCTION

With the increasing maturity of green car technologies, green cars have become a new trend. Many well-known insurance companies worldwide have observed the new trend and have provided premium discounts on automobile insurance rates for green car owners. We explore whether the offer of a premium discount for green car owners by insurance companies is merely a friendly response toward the increased emphasis on environmental protection, or whether these insurance companies appropriately evaluate green car drivers as lower-risk drivers. (1)

By arguing that an individual's behavior may reflect his or her psychological or biological characteristics, previous research has identified that some behavior patterns, such as credit score (Brockett and Golden, 2007) and maintenance records (Bair, Huang, and Wang, 2012), are closely correlated with the individual's driving risk. Hence, because green car drivers take care not to hurt the environment, they choose green cars and may also be more careful drivers. Accordingly, green car drivers may contribute to fewer traffic accidents and seem to deserve a premium discount.

However, there is a competing opinion that the primary reason green car drivers choose green cars is because they are high-mileage drivers. Huang, Tzeng, and Wang (2014) find that individuals who drive more tend to cause more traffic accidents. From this viewpoint, green car drivers may be high-risk drivers.

According to the aforementioned findings, there are two directions from which to deduce the risk level of green car drivers. Whether green car drivers' risk levels are lower depends on whether the effect of driving carefully is completely offset by driving more. Inspired by the concept of pay as you drive, which is mentioned in Litman (2005) and Langford, Methorst, and Hakamies-Blomqvist (2006), the determination of traffic risk from the perspective of "per mile driven" can sometimes be different than from the perspective of "per vehicle-year." (2) Therefore, we also control for the mileage driven per year when testing the comparative traffic accident risks for green car drivers to avoid the determination of the risk of green drivers being clouded by the effect caused by their increased mileage.

Taiwan's automobile insurance market provides an ideal neutral database to investigate the mentioned problems. The hybrid car market is only just emerging in Taiwan, and thus far, the government has not yet provided any policies to promote the purchase of green cars. In addition, the insurance companies have also only just begun debating whether they should provide a green car premium discount. As such, an individual's green car choice is not distorted by any outside forms of promotion through policies. It fully reflects the individual's psychological and biological characteristics, as well as personal vehicle use considerations.

We investigate the comparative traffic accident risks for green car drivers according to their compulsory liability insurance claims records. The comparison is between green cars and their equivalent-model nongreen counterparts, instead of all other vehicles. This ensures that the safety equipment is consistent between green and nongreen cars and achieves appropriate control of the selection problem in our empirical work. (3) Research on compulsory liability insurance contracts can expand our investigation to all drivers on the road instead of selecting drivers according to their insurance contract choices. However, Taiwan's compulsory liability insurance covers only bodily injuries of the victim and provides basic indemnity. Hence, a possible bias could derive from neglecting risks related to property damage and bodily injury losses that are not covered by compulsory insurance. Whether a bias exists is, however, answered by the results of our robustness test.

We collect data from the manufacturer's maintenance departments of one particular brand of vehicle with a major market share in Taiwan. …

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