Nowadays, From the business’s point of view,
Nowadays, withthe development of the advanced information technologies, people can assess tothe information much better than the past. According to Tabarrok and Cowen (2015), it is much easier for the consumers andproducers to get the best and latest information about the quality and theprice of the product, working performance of the employees, intelligentmatching to friends, partners and the nature of financial transactions.
Fromthe business’spoint of view, for instance, due to the development of technologies, Returns (2017) reports that Amazon useArtificial Intelligence (AI) to get deeper understanding of the favour of theconsumers. The company uses Big Data to analyse the information to help organizations to increase revenues and improvebusiness operations. Big data refers to describe the large volume of data. There are two forms of datawhich are structured and unstructured big data. It could reduceasymmetric information by looking for how markets work, how much consumersbenefit, and economic policy and the law and lead to easier trade. There may besome problematic sides to the deficiency of advances in informationtechnologies, it will affect the pricing strategies and market competition.
Inthe following part of my essay, I am going to use the real-world application inthe industry of insurance to analyse the relationship between informationtechnologies and asymmetric information issues and show the advantages of theinformation technologies. In economy, one of the features of competition is imperfect information.However, both consumers and firms prefer to staying in a perfect informationcompany which contains the idealized conditions.
For consumers, they would liketo have a full understanding and information of all the transactions such asthe price, the quality and the production methods of products. It can not only letthe consumers avoid the risk while they are willing to pay but also reduce thesearching costs. For the producers, perfect information can provide bothallocative efficiency and productivity efficiency. In fact, perfect informationrarely exists in the real word. Therefore, we have imperfect informationcontrast to perfect information economy.
Imperfect information economy is morerealistic than perfect information economy. Imperfect information refers to themarket participants do not have all the information under the state of economicenvironment. There are two forms of imperfect information: uncertainty andasymmetric information.
Jeffrey and Russell (1976) provesthat uncertainty is symmetric and introduces risk for consumers and firms andall market participants are uncertain about a future income. There are randomvariables for the uncertain future outcomes and if the consumers know thepossible realization of the random variables and associated possibilities, theycan realize the risk in the process of purchasing. Asymmetric information exists in all the markets such as insurance, retail and banking industry etc. Focuses on the insurance industry, the industry firm will rarely know the preference of the buyers and not even know how much the consumers would likely to spend on. Basically, the consumers do not have so much perfect information about the technology of production and the marginal costs. However, asymmetry in this situation is unnecessary and irrelevant at the most of the time.
Jullien and Salanie (2006) reports that in the case of complete competition, the seller will not benefit from detailed understanding of buyer’s willingness to pay, because he must collect a competitive price, and the buyer does not need information about the technology, because all the information she needs is contained in the price. Therefore, information asymmetry is usually the most important and insignificant. In the whole process, we will focus on the specific circumstances of the insurance contract, which is because the main theoretical contribution of adverse selection competition uses this framework and most of the existing experience documents involve insurance contracts. Rowe (2013) shows that nowadays there is a type of insurance which is called mandatory government insurance. It seems efficient for both consumers and producers at the moment of time, however, it undermines potential real gains in efficiency which would be brought about by market forces.
Therefore, there comes a question to the insurer and the insured. Does it also benefit insurers in the process of the customers buying the package from them? Gao and Plehn-Dujowich (2015) shows that incentive theory refers to the use of a certain management methods to enable employees to work at maximum efficiency. Incentive theory based on the formation of time and its different directions can be roughly divided into content-based incentive theory, process-based incentive theory and comprehensive incentive theory three categories.
For instance, China Life Insurance Company limited is a company that provides life insurance and annuity products. In recent years, the company faced the problem with the loss of talent and low staff productivity so that it adopted an incentive mechanism to improve the situation. There are three main parts the company executed: salary incentive, employee incentive and incentive phase-out incentive. Although those methods do improve the performance of the company, there are still some problems while using the incentive methods. For example, emphasizing on material incentives for employees will neglect their spiritual incentives. The main problem of information asymmetries will bring out the problem of moral hazard.
This situation happens when one party to a contract takes a hidden action that benefits him or her at the expense of another party. For example, in the used cars selling market, the seller knows more about the car than the buyer and the consumers know much more than the insurer about their health situation in the health insurance market. This is called adverse selection. Also, it will lead another problem which is called principle-agent. A principal-agent relationship is a contract that is either explicit or implicit, under which one or more agents designate the hiring of other actors to serve them and pay the appropriate remuneration based on the quantity and quality they provide. According to the report of William. N (2015), the relationship between principal and agent arises with the great development of productivity and the emergence of large-scale production.
The reason for this is that the development of productive forces makes the division of labour further refine. The owners of rights are not able to exercise all their rights because of their own abilities, knowledge and energies. On the other hand, there are a large number of agents with specialized knowledge which were produced by the specialized division of labour. They have the energy and the ability to exercise their delegated rights. However, in the relationship between principal and agent, since the principal and agent’s utility function is different, the client pursues his own wealth more, and the agent pursues his own income of salary allowance, which maximizes the luxury spending and leisure time.
Therefore, this leads to the conflict of interests between them. The agent’s behaviour in the absence of an effective institutional arrangement is likely to gradually damage the client’s interests. For example, there is principle agent problem in the health insurance market. The insurance provides act like the imperfect agents of the patients who would buy the insurance from them. The providers definitely will seem like maximising their profits at the expense of the patients’ interests.
As a result of the different incentives existing to directly connected to the insurance providers’ actions to their profit and lacking of the professional regulations. Buzzachi and Valletti (2004) notices that price discrimination is a dominant strategy based on immutable characteristics such as gender is a dominant strategy in the industry of insurance. Price discrimination is a pricing strategy that charges the customers different prices for the same product.
The final selling price depends on the maximum price that each customer is willing to pay. In the insurance market, there is sometimes some compulsory insurance such as moto insurance since you have to buy the insurance for your car before driving on the road in order to keep yourselves and others in safety. NFU Mutual is an UK car insurance company providing brokers with high qualities insurance products to meet the consumer’s needs.
The company set different prices of different sets of insurance products to different customers which can also be called the personalised prices in the insurance products. The company explains that every customers’ conditions are different so that they offer great value cover that can be personalised to suit the customers’ own needs. This company in the example I show provides flexible options which means the customers only pay for the cover they need. In car insurance, there is a liability except the insured and the insurer which is third- party liability. We can usually see third-party liability in car insurance. Let us suppose that there are two types of customers which are high cost and low cost and they all know which sets of insurance package they would like to buy. The package they choose depends on their private information such as willingness to travel, however, their cost per mile travelled is the same. The consumers travel more was given the higher prices than the one who travel less.
Moreover, insurance company set the price of packages depends on gender. This condition is immutable. For example, men on average travel more which means they are riskier than the women do.
The insurance firm offers the policies at fixed price, consumption of each type is not affected by prices. This gives an advantage to a firm to introduce price discrimination when the rival does not discriminate, let discrimination emerge in the equilibrium. Insurance intermediaries combine the insurance knowledge owners and sellers of. Their identities are easily accepted by both parties to the insurance contract. However, it is worth to be noticed that the insurance intermediary system is sometimes normative such as misleading sales, high commissions, high rebates and other illegal activities from time to time which requires insurance regulator’s intervention. The insurance market enter the path of sustainable development only when insurance intermediaries are fully and regularly developed. Moreover, it must be pointed out that the asymmetric information in the insurance market cannot be eliminated completely.
The impact of asymmetric information on the insurance market will be increasingly complicated by the emergence of diversified risks. Therefore, in order to achieve sustained, rapid and healthy development of the insurance industry, the further study on the impact of asymmetric information on the insurance market is necessary which means to study the behavior of all parties involved in the insurance market under the condition of long-term or short-term asymmetric information, revealing the asymmetry and the inherent characteristics of the insurance market and to provide insurance policy for the insurance business activities. This is the only way we can ensure that the effective operation of the insurance market under the conditions of information asymmetry.
To be concluded, the advanced development of information technology surely mitigate the information asymmetric in the whole market (insurance industry). However, the most important action that the market should execute is to sum up and develop new technologies. Mature insurance technology not only can accurately classify and measure risks, but also design different types of contracts to distinguish between different risk insureds, so as to circumvent the adverse selection of policyholders, and can insure the insured post-act restrictions and incentives to prevent and control moral hazard and reduce policy holder to cheat.
