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Insurance Purchase for Low-Probability Losses

Author

Listed:
  • Susan K. Laury
  • Melayne Morgan McInnes
  • J. Todd Swarthout

Abstract

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 field 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 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 field, it can be attributed to factors other than the relative probability of the loss events.

Suggested Citation

  • Susan K. Laury & Melayne Morgan McInnes & J. Todd Swarthout, 2008. "Insurance Purchase for Low-Probability Losses," Experimental Economics Center Working Paper Series 2008-03, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Oct 2008.
    • Handle: RePEc:exc:wpaper:2008-03
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    File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2008-03.pdf
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    File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2008-13.pdf
    File Function: Revised version, 2008
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    References listed on IDEAS

    as
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    3. Kunreuther, Howard & Slovic, Paul, 1978. "Economics, Psychology, and Protective Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 64-69, May.
    4. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
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    6. Ganderton, Philip T. & Brookshire, David S. & McKee, Michael & Stewart, Steve & Thurston, Hale, 2000. "Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 271-289, May.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    low-probability hazards; insurance; risk; experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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