 An Incentive†Compatible Experiment on Probabilistic Insurance and Implications for an Insurer's Solvency LevelAnja Zimmer, Helmut Gründl, Christian D. Schade and Franca Glenzer Journal of Risk & Insurance, 2018, vol. 85, issue 1, 245-273 Abstract: This article is the first to conduct an incentive†compatible experiment using real monetary payoffs to test the hypothesis of probabilistic insurance, which states that willingness to pay for insurance decreases sharply in the presence of even small default probabilities as compared to a risk†free insurance contract. In our experiment, 181 participants state their willingness to pay for insurance contracts with different levels of default risk. We find that the willingness to pay sharply decreases with increasing default risk. Our results, hence, strongly support the hypothesis of probabilistic insurance. Furthermore, we study the impact of customer reaction to default risk on an insurer's optimal solvency level using our experimentally obtained data on insurance demand. We show that an insurer should choose to be default†free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level. Date: 2018 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:85:y:2018:i:1:p:245-273 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Risk & Insurance is currently edited by Joan T. Schmit More articles in Journal of Risk & Insurance from The American Risk and Insurance Association Contact information at EDIRC. |
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