Monitoring, sensor data, privacy, and consumer behavior : the case of usage-based automobile insurance

The Internet of Things (IoT)-powered services can deliver incredible monitoring capabilities to businesses and their customers. The IoT continues to evolve and reshape the businesses in different industries by collecting individuals’ sensor-based data. In the insurance industry, Usage-Based Insurance (UBI) is a recent auto insurance innovation that enables insurance companies to collect individual-level driving data, provide feedback on driving performance, and offer individually targeted price discounts based on each consumer’s driving behavior. In this thesis, we study consumer behavior from different perspectives in the presence of UBI program that relies on using consumers’ private data in three independent essays. In the first essay, we examine and estimate the effect of the UBI policy on changing the customers’ driving behavior. By considering a fixed-effect model of drivers, we find that motorists improve their driving behavior, resulting in being safer drivers, providing a meaningful benefit for both the driver and the insurance company. We also find heterogeneous effects across different demographic groups. For example, younger drivers are more likely to adopt UBI and they also improve their UBI performance faster than older drivers. To examine the tradeoffs consumer makes between costs (including privacy) and economic benefits of UBI, we study consumers’ adoption and usage of UBI by developing a dynamic structural model in the second essay. Our results suggest that the costs of being monitored (including privacy concerns) are significant, and they vary across demographic characteristics. Using a natural experiment resulting from a major (exogenous) data breach to examine the effect of changing privacy perception, we also find that the data breach is associated with a decrease in retention rates among currently monitored customers. In the third essay, we evaluate the effect of the UBI policy on changing the insurance coverage choice at the renewal time compared to the initial purchase. The results suggest that the UBI customers are significantly more likely to change their coverage choice than non-UBI customers at the renewal time. We capture price discount and information effects as two major sources of difference between UBI and non-UBI customers that could affect the different pattern of insurance coverage choice.Business, Sauder School ofGraduat