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Contract Nonperformance Risk and Uncertainty in Insurance Markets

Christian Biener, Andreas Landmann () and Maria Isabel Santana ()

No 1701, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Insurance contracts may fail to perform, leading to a default on valid claims. We relax the standard assumption of known probalilities for such defaults by allowing for uncertainty. Within a large behavioral experiment, we show that introducing risk an uncertainty each leads to significant reductions in unsurance demand and that the effects are comparable in magnitude (17.1 and 14.5 percentage points). Furthermore, risk-and ambiguity-averse participants are affected most. These findings are in line with models incorporating ambiguity attitudes or, alternatively, pessimistic beliefs. An analysis of the belief and decision dynamics suggest persistent pessimistic priors and disregard of peer experiences, leading to a stable uncertainty effect.

Keywords: uncertainty; ambiguity preferences; pessimistic beliefs; contract nonperformance; insurance (search for similar items in EconPapers)
JEL-codes: D03 D81 D83 G22 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2017-01, Revised 2019-04
New Economics Papers: this item is included in nep-exp and nep-upt
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Journal Article: Contract nonperformance risk and uncertainty in insurance markets (2019) Downloads
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