The Loss of the Certainty Effect

Richard E. Stewart and Barbara D. Stewart

Risk Management and Insurance Review, 2001, vol. 4, issue 2, 29-49

Abstract: Recent changes in the commercial property‐liability insurance business have made it unlikely that large claims will be paid promptly and willingly. The situation is not limited to asbestos, pollution, and medical product liability, though certainly evident there. The authors examine the situation from three economic and psychological perspectives—option theory, asymmetric information theory, and prospect theory. All three indicate that if insurance were seen by customers as less than fully certain and reliable, the resulting discounting of its value—and hence buyers' willingness to pay for it—would be much deeper than one would expect. Although competitive and legal steps could be taken to head off such a disaster, none of them is likely.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:bla:rmgtin:v:4:y:2001:i:2:p:29-49

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