Insurance Purchase for Low-Probability Losses

Susan Laury, Melayne McInnes and J. Swarthout

No 2008-03, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

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.

Keywords: low-probability hazards; insurance; risk; experiments (search for similar items in EconPapers)
JEL-codes: C91 D80 (search for similar items in EconPapers)
Pages: 26
Date: 2008-01, Revised 2008-10
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-ias and nep-upt
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http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2008-03.pdf First version, 2008 (application/pdf)
http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2008-13.pdf Revised version, 2008 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:exc:wpaper:2008-03

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