The Valuation of Insurance under Uncertainty: Does Information about Probability Matter?

Abstract

In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensitive to the amount of information available on the probability of a potential loss. In order to test this hypothesis we simulate a market in which we elicit individuals' willingness to pay to insure against a loss characterised either by known or else vague probabilities. We use two distinct treatments by providing subjects with different information over the vague probabilities of loss. In general we find that uncertainty about probabilities has a weak impact on consumers' valuation of insurance. However, additional information about probabilities tends to marginally increase the price individuals are willing to pay to insure themselves. Implications for the insurance market are derived.

Do Trade Union Leaders Violate Subjective Expected Utility? Some Insights From Experimental Data

“…Few early general experiments have reported the presence of ambiguity preference (see, for example, Heath and Tversky, 1991;Hogarth and Einhorn, 1990;Fox and Tversky, 1995). More recently, Wakker et al, (2003) and Di Mauro and Maffioletti (2001b) have shown that individuals may be ambiguity prone and not only ambiguity averse in an insurance context. This seems especially true when subjects make a comparison between something that they do know and something that they do not know much about.…”

Economic Experiments, Hypothetical Surveys and Market Data Studies of Insurance Demand Against Low‐probability/High‐impact Risks: A Systematic Review of Designs, Theoretical Insights and Determinants of Demand

“…Einhorn and Hogarth (), Hogarth and Kunreuther () and Di Mauro and Maffioletti () all find results compatible with the switching behaviour implied by the theory. Nevertheless, Di Mauro and Maffioletti () do not conclude that the majority of subjects exhibit switching behaviour.…”

“…An important difference between the two sets of findings is that Einhorn and Hogarth () and Hogarth and Kunreuther () utilized hypothetical incentives, whereas Di Mauro and Maffioletti () conduct an incentivized experiment. Di Mauro and Maffioletti () find a significant effect of ambiguity in an incentivized experiment as well, although they stipulate that the effect is weaker than that found in the earlier studies. Therefore, the saliency of the impact of ambiguity may decline when real incentives are used, possibly because individuals make a greater effort in calculating actual probabilities when there is something to be lost.…”

“…A decision under ambiguity considers the case where the latter information is unavailable, and subjects cannot form subjective belief distributions. Uncertainty is operationalized with multiple equiprobable probabilities of loss (Camerer and Kunreuther, ; Brunette et al ., ), and ambiguity is implemented by providing some incomplete information so that subjects cannot form a comprehensive belief distribution (Einhorn and Hogarth, ; Hogarth and Kunreuther, ; Di Mauro and Maffioletti, ; ).…”

“…Mixed findings: m. For studies that did not examine the influence of specific variables on insurance demand, results are N/A. Such studies were interested in topics like: the validity of EUT for insurance decisions (Murray, , ); the acceptance of various methods to elicit insurance preferences (Neter and Williams, ); the impact of framing on insurance decisions (Schoemaker and Kunreuther, ; Shogren, ; Connor, ); the influence of various factors on ambiguity preference (Einhorn and Hogarth, ; Hogarth and Kunreuther, ; Di Mauro and Maffioletti, , ); the influence of experience and incentives on insurance decisions (Shogren, ; Irwin et al ., ; McClelland et al ., ); the influence of various factors on probability weighting (Fehr‐Duda et al ., ; Kusev et al ., , ; Petrova et al ., ) and the influence of various factors on policy switching behaviour (Schram and Sonnemans, ).…”