This paper examines advantageous selection in automobile liability insurance from
the approach with hidden action, which argues that the individual’s private
information on his own characteristics will affect his decision on the investment on
precautionary effort (hidden action) to reduce the loss probability and further results
in a negative relationship between coverage and loss probability in equilibrium. We
argue that individual’s vehicle maintenance record could be a proper proxy for the
precautionary effort. By combining insurance data from an insurance company and
maintenance data from the largest car manufacturer in Taiwan, we demonstrate
advantageous selection in automobile liability insurance in Taiwan.
