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Is default risk acceptable when purchasing insurance? Experimental evidence for different probability representations, reasons for default, and framings

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  • Zimmer, Anja
  • Schade, Christian
  • Gründl, Helmut

Abstract

We experimentally analyze consumers' reactions to insurance default risk. Consistent with earlier studies, we find that insurance with default risk is extremely unattractive to most individuals. A considerable fraction of consumers completely refuse to accept any default risk; others ask for large reductions in insurance premiums. These findings are robust against several variations of the setup: probability representations (verbal and numeric), reasons for default (insolvency and claim settlement practices), framing (positively and negatively expressed probability of default), and comparisons between the policy's level of default and that of an alternative (default free and small default risk). The major driver of willingness to pay is level of security concern and decisions are sensitive to the default probability. All other effects on willingness to pay are unsystematic.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 30 (2009)
Issue (Month): 1 (February)
Pages: 11-23

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Handle: RePEc:eee:joepsy:v:30:y:2009:i:1:p:11-23

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Web page: http://www.elsevier.com/locate/joep

Related research

Keywords: Insurance default risk Verbal probabilities Concern Framing;

References

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  1. Johnson, Eric J, et al, 1993. " Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
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Citations

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Cited by:
  1. Zhou-Richter, Tian & Gründl, Helmut, 2011. "Life care annuities: Trick or treat for insurance companies?," ICIR Working Paper Series 04/11, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
  2. Burren, Daniel, 2013. "Insurance demand and welfare-maximizing risk capital—Some hints for the regulator in the case of exponential preferences and exponential claims," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 551-568.
  3. Dong, Ming, 2014. "The impact of firm-level transparency on the ex ante risk decisions of insurers: Evidence from an empirical study," ICIR Working Paper Series 14/14, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
  4. Zimmer, Anja & Gründl, Helmut & Schade, Christian, 2012. "Be as safe as possible: A behavioral approach to the optimal corporate risk strategy of insurers," ICIR Working Paper Series 06/11, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.

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