Insurance Purchase for Low-Probability Losses

Susan Laury, Melayne Morgan McInnes, J. Todd Swarthout
2008 Social Science Research Network  
It is widely accepted that individuals tend to underinsure against low-probability, high-loss events relative to high-probability, low-loss events. This conventional wisdom is based largely on ...eld studies, as there is very little experimental evidence. We reexamine this issue with an experiment that accounts for possible confounds in prior insurance experiments. Our results are counter to the prior experimental evidence, as we observe subjects buying more insurance for low-probability events
more » ... -probability events than the higher-probability events, given a constant expected loss and load factor. Our results suggest that, to the extent underinsurance for catastrophic risk is observed in the ...eld, it can be attributed to factors other than the relative probability of the loss events. Our study has led us to conclude that the primary cause of failure in the disaster insurance market is consumer disinterest. If insurance is to be marketed on a voluntary basis, then consumer's attitudes and information processing limitations must be taken into account. (Kunreuther and Slovic, 1978, p. 67)
doi:10.2139/ssrn.1090266 fatcat:rx2mvodjj5hb7aaxnwolpioefu