Insurance decisions under nonperformance risk and ambiguity

Abstract

An important societal problem is that people underinsure against risks that are unlikely or occur in the far future, such as natural disasters and long-term care needs. One explanation is that uncertainty about the risk of non-reimbursement induces ambiguity averse and risk prudent decision makers to take out less insurance. We set up an insurance experiment to test this explanation. Consistent with the theoretical predictions, we find that the demand for insurance is lower when the nonperformance risk is ambiguous than when it is known and when decision makers are risk prudent. We cannot attribute the lower take-up of insurance to our measure of ambiguity aversion, probably because ambiguity attitudes are richer than aversion alone.

Probability weighting and insurance demand in a unified framework

“…Segal's (1990) recursive RDU model allows for violations of ROCL. Recent experimental evidence suggests that this model performs worse at explaining insurance choices than conventional RDU with ROCL (see Lambregts et al 2021).…”

Asymmetric information and insurance cycles

“…Alternatively, if insurers follow a value-at-risk model, insurer behavior would be the same so long as θ is larger than the required confidence level of the value-at-risk model. Finally, this assumption could also be justified if policyholders treated nonperformance risk as ambiguous, as in Lambregts et al (2021).…”