Behavioral economics and insurance: Principles and solutions

Abstract

Established in 1984, the Wharton Risk Management and Decision ProcessesCenter develops and promotes effective corporate and public policies for low-probability events with potentially catastrophic consequences through the integration of risk assessment, and risk perception with risk management strategies. Natural disasters, technological hazards, and national and international security issues (e.g., terrorism risk insurance markets, protection of critical infrastructure, global security) are among the extreme events that are the focus of the Center's research.The Risk Center's neutrality allows it to undertake large-scale projects in conjunction with other researchers and organizations in the public and private sectors. Building on the disciplines of economics, decision sciences, finance, insurance, marketing and psychology, the Center supports and undertakes field and experimental studies of risk and uncertainty to better understand how individuals and organizations make choices under conditions of risk and uncertainty. Risk Center research also investigates the effectiveness of strategies such as risk communication, information sharing, incentive systems, insurance, regulation and public-private collaborations at a national and international scale. From these findings, the Wharton Risk Center's research team -over 50 faculty, fellows and doctoral students -is able to design new approaches to enable individuals and organizations to make better decisions regarding risk under various regulatory and market conditions. The Center is also concerned with training leading decision makers. It actively engages multiple viewpoints, including top-level representatives from industry, government, international organizations, interest groups and academics through its research and policy publications, and through sponsored seminars, roundtables and forums.More information is available at

Managing coastal flood risk to residential properties in England: integrating spatial planning, engineering and insurance

“…Insurance has no direct effect on the source or pathway element of a flood hazard. Studies on insurance from the Netherlands, France, and the USA demonstrate that insurance can be used to encourage household behaviour to adapt potential residential properties (receptors) to be better able to cope with flood hazards (Botzen, Aerts and van den Bergh 2009;Poussin, Botzen and Aerts 2014;Kunreuther and Pauly 2015;Abraham and Chiappori 2015), but there has been little similar research in England. This adaptive use of insurance is rarely applied in England and it has as yet been little incorporated in insurance premium prices or deductibles (Harries 2009;Dávila et al 2014).…”

Rationality of Life Insurance Behavior under Economic Uncertainty

“…With regard to decisions in insurance, this means consumers' faults in refusing to insure low-probability and at the same time high-consequence events like nature disasters (Kunreuther and Slovic, 1978;Tversky and Fox, 1995). The research are concentrated in such areas as risk perception with the gap between expert views of risk and public perceptions (Slovic, 1972); probabilistic insurance with different weight of probabilities (Wakker et al, 1997;Zimmer et al, 2008); behavioral life cycle with preference current gratification instead of future balanced long-term expenditures (Shefrin and Thaler, 1988); rank dependent utility theory with subjective overweighed unlikely extreme outcomes (Quggin, 1982); overconfidence, for instance, by overestimating own knowledge and ability to control events while underestimating risks (Johnson et al, 1993); impact of high costs of obtaining information regarding insurance costs and benefits on fail to purchase insurance (Kunreuther and Pauly, 2005), using feelings and intuition within insurance decision making process (Kunreuther and Pauly, 2014). Summing up main prospect theory and probabilistic insurance hypotheses we can define following: subjective perception of objective insurance probabilities; diverse weights of present and future events; taking into account unperfected information and presence of transaction costs; fail in purchase of insurance for low probability high-consequence events; impact subjective over-and underestimations, confidence, social patterns.…”

Reflections on the Customer Decision-Making Process in the Digital Insurance Platforms: An Empirical Study of the Baltic Market

“…From a theoretical point of view, the research refers to predecessor studies in the field of non-life insurance consumer decision-making, such as Hsee and Kunreuther (2000) [7], Kunreuther and Pauly (2006; [8,9], and a cross-border study report by the European Commission (2017) [10]. The present research also follows key findings and limitations of scientific studies on behavioral patterns in the Baltic insurance market, such as research by Kiyak and Pranckeviči ūt ė (2014) [11], and longitudinal studies conducted by Ulbinait ė et al (2010,2011,2013) [12][13][14][15].…”