ARE GREEN CAR DRIVERS FRIENDLY DRIVERS? A STUDY OF TAIWAN'S AUTOMOBILE INSURANCE MARKET

• Author: Kili C. Wang,Jerry S. Huang
• Published date: 01 March 2019
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/jori.12202

ARE GREEN CAR DRIVERS FRIENDLY DRIVERS?ASTUDY

OF TAIWAN’SAUTOMOBILE INSURANCE MARKET

Jerry S. Huang

Kili C. Wang

ABSTRACT

By integrating claims data f rom Taiwan’s compulsory liab ility insurance

with a unique data set on dr iving mileage records fo r each car, this article

examines whether green car dri vers have lower accident risk. We find that

after controlling for the milea ge driven per car, the traffic acci dent risk of

green car drivers is significa ntly lower. Our empirical evi dence also

confirms that green car drivers ar e, on average, high-mileage dr ivers.

Moreover, driving more resul ts in a higher accident probabil ity for green

car drivers despite their b eing lower-risk drivers . The policy implications

are discussed.

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

Jerry S. Huang is a Manager in the Automobile Insurance Product Department, Fubon

Insurance Co., Ltd, Taiwan. Kili C. Wang is a Professor in the Department of Insurance,

Tamkang University, Taiwan and also a Research Fellow at the Risk and Insurance Research

Center, College of Commerce, National Chengchi University. Wang can be contacted via email:

kili@mail.tku.edu.tw. The authors gratefully acknowledge the helpful comments received from

Larry Tzeng, Gene Lai, Michael Hoy, Michael Powers, Sojung Carol Park, Thanasis Stengos,

Rachel Huang; participants at the 2015 World Risk and Insurance Economic Congress, the

IRFRC 2015 annual conference, and the Taiwan Risk and Insurance Association 2015 annual

conference; and two anonymous reviewers.

1

The “green cars” that are the focus of this empirical research are hybrid vehicles.

© 2017 The Journal of Risk and Insurance. Vol. 86, No. 1, 103–119 (2019).

DOI: 10.1111/jori.12202

103

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 ofpayasyoudrive,whichismentioned

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

2

Litman (2005) and Langford, Methorst, and Hakamies-Blomqvist (2006) indicate that elderly

drivers could have higher crash rates per mile driven but have lower crash rates per vehicle-

year because they drive less annually.

3

We discuss this in greater detail in the next section.

104 THE JOURNAL OF RISK AND INSURANCE