Estimating Risk Preferences from Deductible Choice

Abstract

We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing. (JEL D81, G22)

The gender gap in mortality: How much is explained by behavior?

“…Croson and Gneezy (2009) review the experimental economics literature on gender specific preferences and conclude that men take riskier decisions in both hypothetical and real gambles. These results can be also observed when looking at direct evidence from risky decisions made by actual market participants (see, for example, Cohen and Einav (2007) on auto insurance contracts and Sunden (1998) on pension contribution plans). Mazzocco (2008) estimates the gender-specific intertemporal elasticity of substitution using data from the Consumer Expenditure Survey and finds it to be significantly lower for women than for men.…”

Estimating Welfare in Insurance Markets Using Variation in Prices

“…As a result, comparisons of welfare estimates obtained by this approach across di¤erent settings may be quite informative. For example, 4 9 Examples in property-casualty insurance markets include Chiappori et al (2006) and Cohen and Einav (2007) for automobile insurance and Sydnor (2006) for home owner's insurance. In health-and life-related insurance markets, examples include Finkelstein and Poterba (2004) for annuities, Cutler and Reber (1998) and Eichner, McLellan, and Wise (1998) for health insurance, and Finkelstein and McGarry (2006) for long-term care insurance.…”

“…5 3 Examples include …rm experimentation with their pricing policy (Cohen and Einav, 2007), discrete pricing policy changes (Adams, Einav, and Levin, forthcoming), out of equilibrium pricing decisions made by human resource managers for employee insurance bene…ts (Cutler and Reber, 1998), and the rules …rms use to adjust individuals' prices in response to their prior claims experience (Abbring, Chiappori, and Pinquet, 2003;Israel, 2004).…”

Hips and hearts: The variation in incentive effects of insurance across hospital procedures

“…See Finkelstein and McGarry (2006), Cohen and Einav (2007), Fang et al (2008) and Olivella and Vera-Hernndez (2013) for examples and Cohen and Siegelman (2010) for a survey. Interest in this liter-ature was sparked by findings of advantageous selection in particular insurance markets.…”