Pretending Ignorance Is Bliss: Competing Insurers with Heterogeneous Informational Advantages

The availability of big data and analytics expertise provides insurers with an informative advantage over policyholders in estimating risk. We study competition between heterogeneously informed insurers, showing that their information may or not be revealed in equilibrium. We find that all equilibria are profitable and that non-informative equilibria entail risk pooling and possibly efficiency. In informative equilibria, the signaling problem interacts with the screening problem that arises endogenously from insurers' revelation of information, implying underinsurance. Our main insights are robust to changes in insurers' information precision and market concentration, and to the presence of two-sided asymmetric information and withdrawable contracts.