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

Howard Kunreuther () and Erwann Michel-Kerjan ()

Journal of Risk and Uncertainty, 2015, vol. 51, issue 2, 194 pages

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

Keywords: Individual decision-making; Choice under uncertainty; Multi-year insurance; Disaster; C90; D81; G22 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (17)

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DOI: 10.1007/s11166-015-9225-4

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