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Demand for fixed-price multi-year contracts: Experimental evidence from insurance decisions

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  • Howard Kunreuther
  • Erwann Michel-Kerjan

Abstract

Do individuals prefer a fixed-price multi-year insurance (MYI) policy to current annual contracts with fluctuating prices? If so, are they willing to pay more for these policies? In a web-based 2-period repeated game with significant real money at stake, individuals have an opportunity to purchase 1-period insurance contracts, 2-period contracts or no insurance against the risk of a hurricane causing damage to their property. When premiums for both insurance options are actuarially fair, more than five times as many people favor the 2-period contract over the 1-period contract. The demand for a 2-period contract remains high even with a loading cost of 5% and 10% while keeping the 1-period premium actuarially fair, indicating a preference for stable premiums over time. These findings support the need for multi-year contracts that will lead more individuals to be adequately protected against future extreme events, given the empirical evidence on lack of interest in insurance against catastrophic risks. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Howard Kunreuther & Erwann Michel-Kerjan, 2015. "Demand for fixed-price multi-year contracts: Experimental evidence from insurance decisions," Journal of Risk and Uncertainty, Springer, vol. 51(2), pages 171-194, October.
    • Handle: RePEc:kap:jrisku:v:51:y:2015:i:2:p:171-194
    DOI: 10.1007/s11166-015-9225-4
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    3. Anne Corcos & François Pannequin & Claude Montmarquette, 2017. "Statistical Tests of the Demand for Insurance: An “All or Nothing” Decision," CIRANO Working Papers 2017s-07, CIRANO.
    4. Daniel Seaberg & Laura Devine & Jun Zhuang, 2017. "A review of game theory applications in natural disaster management research," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 89(3), pages 1461-1483, December.
    5. Kate Booth & Bruce Tranter, 2018. "When disaster strikes: Under-insurance in Australian households," Urban Studies, Urban Studies Journal Limited, vol. 55(14), pages 3135-3150, November.
    6. Osberghaus, Daniel & Reif, Christiane, 2021. "How do different compensation schemes and loss experience affect insurance decisions? Experimental evidence from two independent and heterogeneous samples," Ecological Economics, Elsevier, vol. 187(C).
    7. Thomas Dudek & Eric R. Ulm & Ilan Noy, 2021. "Demand for Multi-Year Catastrophe Insurance Contracts: Experimental Evidence for Mitigating the Insurance Gap," CESifo Working Paper Series 9442, CESifo.
    8. Peter John Robinson & W. J. Wouter Botzen, 2018. "The impact of regret and worry on the threshold level of concern for flood insurance demand: Evidence from Dutch homeowners," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 13(3), pages 237-245, May.
    9. Ruo Jia & Zenan Wu, 2019. "Insurer commitment and dynamic pricing pattern," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(1), pages 87-135, March.
    10. repec:cup:judgdm:v:13:y:2018:i:3:p:237-245 is not listed on IDEAS
    11. Biener, Christian & Eling, Martin & Jia, Ruo, 2017. "The structure of the global reinsurance market: An analysis of efficiency, scale, and scope," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 213-229.
    12. Liu, Tongxin & Shao, Jianfang & Wang, Xihui, 2022. "Funding allocations for disaster preparation considering catastrophe insurance," Socio-Economic Planning Sciences, Elsevier, vol. 84(C).
    13. Atreya, Ajita & Ferreira, Susana & Michel-Kerjan, Erwann, 2015. "What drives households to buy flood insurance? New evidence from Georgia," Ecological Economics, Elsevier, vol. 117(C), pages 153-161.
    14. Shereen J. Chaudhry & Michael Hand & Howard Kunreuther, 2020. "Broad bracketing for low probability events," Journal of Risk and Uncertainty, Springer, vol. 61(3), pages 211-244, December.
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    17. Mol, Jantsje M. & Botzen, W.J. Wouter & Blasch, Julia E., 2020. "Behavioral motivations for self-insurance under different disaster risk insurance schemes," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 967-991.

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    More about this item

    Keywords

    Individual decision-making; Choice under uncertainty; Multi-year insurance; Disaster; C90; D81; G22;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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