Insurance Demand Anomalies and Regulation

Abstract

In recent years, it has become increasingly clear that risk aversion alone cannot explain individuals' demand for insurance. From the perspective of risk aversion, individuals tend to purchase insurance when they should not, refuse to purchase insurance when they should, prefer sub‐optimal payouts and allow irrelevant considerations to influence their insurance preferences. This article considers the normative implications of these insurance demand anomalies. It argues that while they are generally the result of consumer mistakes, they may also reflect sophisticated decision making. Given these conflicting explanations, the article explores a spectrum of “libertarian paternalistic” regulatory interventions in insurance markets.

Determinants of Probability Neglect and Risk Attitudes for Disaster Risk: An Online Experimental Study of Flood Insurance Demand among Homeowners

“…Individuals may be less likely to judge flood risks as below a threshold of concern if the risk is described in a multiyear context (Botzen et al., ). Schwarcz () describes possible risk communication strategies for disaster type risks consistent with what Thaler and Sunstein () defined as “libertarian‐paternalism” or nudge strategies, such as framing the risk for more than one time period, like the period during which someone on average lives in a flood‐prone area (e.g., 25 years). Such a strategy is attractive in the short run given its low implementation costs.…”

Identifying Non‐Adopter Consumer Segments: An Empirical Study on Earthquake Insurance Adoption in Turkey

“…In total, 802 respondents were surveyed face-to-face based on simple random sampling of addresses provided by the Turkish Statistical (2000); Schwarcz (2010) Protection motivation theory also suggests that motivation toward protection to a large extent is driven by costs-benefit analysis where risk perceptions play an important role. Specifically, in the context of insurance, findings indicate that the more risk averse an individual the higher the amount insured.…”

Product Ratings as a Market Reaction to Deregulation: Evidence From the German Insurance Market

“…On the other hand, survey research suggests that many consumers do not understand insurance policy language and terms (National Association of Insurance Commissioners [NAIC], 2010; Organisation for Economic Co-operation and Development [OECD], 2008;Tennyson, 2011a), and that most consumers do not read insurance policy disclosures (Cude, 2005). Some observers argue that if consumers cannot or do not effectively compare products, regulatory protections may lead to better market outcomes in practice, even if theory would suggest otherwise (Trebilcock, 2003;Schwarcz, 2010;Klemperer, 1999). Others note that product regulations may support more effective consumer search and decision making, since consumers will need less information to make informed choices (Grace and Scott, 2009).…”