Feeling Is Believing? Evidence From Earthquake Shaking Experience and Insurance Demand

Abstract

This article investigates how a particular type of personal experience-"no-loss" experience with minor earthquakes-affects financial decisions such as insurance purchases. We find a small temporary increase in insurance demand in areas that experience a shaking with moderate intensity, or multiple shakings with light intensity. An analysis of Google Trends data confirms an immediate increase in interest in insurance though not in seismic retrofit. These findings extend the applicability of the availability bias and hot-hand fallacy to a broader context: financial decisions may be motivated by not only loss experience, but also recent no-loss experience, as people may extrapolate their "feeling" to something worse. However, such experience does not motivate long-term behavioral change.

California earthquake insurance unpopularity: the issue is the price, not the risk perception

“…The time series of r N is represented in Figure 6 and illustrates that some earthquakes (indicated by dots) have increased r N during the year as already published (Buffinton 1961;Kunreuther et al 1978;Meltsner 1978;Lin 2015) Figure 6. Estimated subjective annual occurrence probability between 1927 and 2016.…”

“…where g N and β are the wealth function at year N and the risk profile controlling the risk aversion level (the larger β, the higher the aversion), respectively. Then, the average household's capital K is assumed in this study equal to the average sum insured (ASI 2015 ) since the earthquake insurance consumption is uncorrelated to the wealth (Kunreuther et al 1978;Wachtendorf and Sheng 2002) Regarding the loss estimation, homeowners are mostly concerned by destructive earthquakes, defined as earthquakes which can potentially damage their home, and tend to overestimate the impact (Buffinton 1961;Kunreuther et al 1978;Meltsner 1978;Lin 2015). Furthermore, according to Kunreuther et al (1978), insured people believe that they are fully covered in case of loss.…”

“…Since homeowners are aware of the destructive potential of a major earthquake, the risk perception reflects their personal estimate of the occurrence (Kunreuther et al 1978;Wachtendorf and Sheng 2002). Indeed, most of them disregard this risk because it is seldom, even if destructive earthquake experiences foster insurance underwriting during the following year (Buffinton 1961;Kunreuther et al 1978;Meltsner 1978;Lin 2015). Consequently, earthquake insurance purchasing behaviour is correlated to personal understanding of seismic risk and is not only related to scientific-based hazard level (Palm and Hodgson 1992a;Palm 1995;Wachtendorf and Sheng 2002).…”

“…According to the authors, the model failed because many surveyed people had a lack of knowledge in existing insurance solutions or were unable to quantify the risk. Models published later (Latourrette et al 2010;Lin 2013;Lin 2015) assessed the take-up rate by zipcode and used demographic variables to capture the disparity in insurance solutions knowledge. Nevertheless because of lack of data, they assumed the premium amount or the risk perception as constant.…”

Time windows of opportunities to fight earthquake under-insurance: evidence from Google Trends

“…One of these tools is the insurance and the literature on disasters highlights the role played by coverages in mitigating disaster risk (Kunreuther, 2000). In this perspective, homeowners earthquake insurance is often proposed as a useful mean for a post-disaster recovery plan, providing also incentives to preventive behaviours (Kunreuther et al, 1988;Lin, 2019a;Palm, 2020).…”