Demand for Windstorm Insurance Coverage and the Representative Heuristic

Randy E. Dumm, David L. Eckles (), Charles Nyce and Jacqueline Volkman-Wise
Additional contact information
Randy E. Dumm: Fox School of Business, Temple University
David L. Eckles: University of Georgia
Charles Nyce: Florida State University

The Geneva Risk and Insurance Review, 2017, vol. 42, issue 2, No 2, 117-139

Abstract: Abstract With recent research suggesting a behavioral explanation for changes in demand for insurance (e.g., Volkman-Wise (2015)), we study homeowners’ demand for windstorm insurance in the wake of losses. In particular, we examine the representative heuristic’s impact on the demand for homeowners’ insurance, which provides coverage for windstorm losses, in Florida (U.S.). Under this paradigm, individuals underweight prior probabilities and overweight posterior probabilities. This results in an over (under)-weighting of the probability of a loss from a disaster in the event (absence) of a disaster. Using data for new homeowners’ insurance, purchases in Florida’s residual market between 2005 and 2007 (a period of high hurricane activity), we find, subsequent to losses, the demand for coverage limits and the number of policies sold both increase. Further, we find that this effect attenuates as the losses become further away in time. That is, more recent losses have a stronger effect on demand. This attenuation of the demand is also consistent with the representative heuristic.

Keywords: natural disasters; insurance demand; catastrophic risk; risk beliefs; heuristics (search for similar items in EconPapers)
JEL-codes: D03 D81 D83 G02 G22 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://link.springer.com/10.1057/s10713-017-0021-8 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Journal Article: Demand for Windstorm Insurance Coverage and the Representative Heuristic (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:genrir:v:42:y:2017:i:2:d:10.1057_s10713-017-0021-8

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10713

DOI: 10.1057/s10713-017-0021-8

Access Statistics for this article

The Geneva Risk and Insurance Review is currently edited by Michael Hoy and Nicolas Treich

More articles in The Geneva Risk and Insurance Review from Palgrave Macmillan, International Association for the Study of Insurance Economics (The Geneva Association) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().