Digitalisation and cream skimming adverse selection in the property-casualty insurance industry: evidence from China

This study examines the potential of digitalisation to mitigate insurers’ vulnerability to cream skimming adverse selection and explores the mechanism underlying this effect. Employing unbalanced panel data of 84 property-casualty insurance companies in China from 2010 to 2020, our investigation reveals that digitalisation reduces insurers’ susceptibility to cream skimming adverse selection, especially among firms located in areas with lower levels of social trust. Digitalised insurers are able to collect a wider variety of customer information, make pricing more effective and therefore achieve lower loss ratios in contrast to their less digitalised rivals. Moreover, we discern a more pronounced impact of digitalisation on companies during their growth stages as compared to their well-established counterparts. Our findings remain robust when subjected to various endogeneity and robustness tests.