IDEAS home Printed from https://ideas.repec.org/a/pal/genrir/v42y2017i2d10.1057_s10713-017-0021-8.html
   My bibliography  Save this article

Demand for Windstorm Insurance Coverage and the Representative Heuristic

Author

Listed:
  • Randy E. Dumm

    (Fox School of Business, Temple University)

  • David L. Eckles

    (University of Georgia)

  • Charles Nyce

    (Florida State University)

  • Jacqueline Volkman-Wise

    (Fox School of Business, Temple University)

Abstract

With recent research suggesting a behavioral explanation for changes in demand for insurance (e.g., Volkman-Wise (2015)), we study homeowners’ demand for windstorm insurance in the wake of losses. In particular, we examine the representative heuristic’s impact on the demand for homeowners’ insurance, which provides coverage for windstorm losses, in Florida (U.S.). Under this paradigm, individuals underweight prior probabilities and overweight posterior probabilities. This results in an over (under)-weighting of the probability of a loss from a disaster in the event (absence) of a disaster. Using data for new homeowners’ insurance, purchases in Florida’s residual market between 2005 and 2007 (a period of high hurricane activity), we find, subsequent to losses, the demand for coverage limits and the number of policies sold both increase. Further, we find that this effect attenuates as the losses become further away in time. That is, more recent losses have a stronger effect on demand. This attenuation of the demand is also consistent with the representative heuristic.

Suggested Citation

  • Randy E. Dumm & David L. Eckles & Charles Nyce & Jacqueline Volkman-Wise, 2017. "Demand for Windstorm Insurance Coverage and the Representative Heuristic," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(2), pages 117-139, September.
    • Handle: RePEc:pal:genrir:v:42:y:2017:i:2:d:10.1057_s10713-017-0021-8
    DOI: 10.1057/s10713-017-0021-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s10713-017-0021-8
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s10713-017-0021-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Browne, Mark J & Hoyt, Robert E, 2000. "The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 291-306, May.
    2. Christian Gollier, 2003. "To Insure or Not to Insure?: An Insurance Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 5-24, June.
    3. David M. Grether, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 537-557.
    4. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    5. repec:cup:judgdm:v:10:y:2015:i:4:p:365-385 is not listed on IDEAS
    6. Erwann O. Michel‐Kerjan & Carolyn Kousky, 2010. "Come Rain or Shine: Evidence on Flood Insurance Purchases in Florida," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 369-397, June.
    7. Cass Sunstein & Richard Zeckhauser, 2011. "Overreaction to Fearsome Risks," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(3), pages 435-449, March.
    8. S. Hun Seog, 2008. "Informational Cascade in the Insurance Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 145-165, March.
    9. Jacqueline Volkman-Wise, 2015. "Representativeness and managing catastrophe risk," Journal of Risk and Uncertainty, Springer, vol. 51(3), pages 267-290, December.
    10. Bin, Okmyung & Landry, Craig E., 2013. "Changes in implicit flood risk premiums: Empirical evidence from the housing market," Journal of Environmental Economics and Management, Elsevier, vol. 65(3), pages 361-376.
    11. Cassandra R. Cole & David A. Macpherson & Patrick F. Maroney & Kathleen A. McCullough & James W. (Jay) Newman, Jr & Charles Nyce, 2011. "The Use of Postloss Financing of Catastrophic Risk," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 14(2), pages 265-298, September.
    12. Daniel R. Petrolia & Joonghyun Hwang & Craig E. Landry & Keith H. Coble, 2015. "Wind Insurance and Mitigation in the Coastal Zone," Land Economics, University of Wisconsin Press, vol. 91(2), pages 272-295.
    13. Schlesinger, Harris, 1999. "Decomposing catastrophic risk," Insurance: Mathematics and Economics, Elsevier, vol. 24(1-2), pages 95-101, March.
    14. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    15. Erwann Michel‐Kerjan & Sabine Lemoyne de Forges & Howard Kunreuther, 2012. "Policy Tenure Under the U.S. National Flood Insurance Program (NFIP)," Risk Analysis, John Wiley & Sons, vol. 32(4), pages 644-658, April.
    16. Justin Gallagher, 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 206-233, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xiao Lin, 2020. "Risk awareness and adverse selection in catastrophe insurance: Evidence from California’s residential earthquake insurance market," Journal of Risk and Uncertainty, Springer, vol. 61(1), pages 43-65, August.
    2. Xiao Lin, 2020. "Feeling Is Believing? Evidence From Earthquake Shaking Experience and Insurance Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 351-380, June.
    3. Chloe H. Lucas & Kate I. Booth & Carolina Garcia, 2021. "Insuring homes against extreme weather events: a systematic review of the research," Climatic Change, Springer, vol. 165(3), pages 1-21, April.
    4. Shinichi Kamiya & Noriyoshi Yanase, 2019. "Learning from extreme catastrophes," Journal of Risk and Uncertainty, Springer, vol. 59(1), pages 85-124, August.
    5. Benjamin L. Collier & Marc A. Ragin, 2020. "The Influence of Sellers on Contract Choice: Evidence from Flood Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 523-557, June.
    6. Randy E. Dumm & David L. Eckles & Charles Nyce & Jacqueline Volkman-Wise, 2020. "The representative heuristic and catastrophe-related risk behaviors," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 157-185, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jacqueline Volkman-Wise, 2015. "Representativeness and managing catastrophe risk," Journal of Risk and Uncertainty, Springer, vol. 51(3), pages 267-290, December.
    2. Randy E. Dumm & David L. Eckles & Charles Nyce & Jacqueline Volkman-Wise, 2020. "The representative heuristic and catastrophe-related risk behaviors," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 157-185, April.
    3. Shinichi Kamiya & Noriyoshi Yanase, 2019. "Learning from extreme catastrophes," Journal of Risk and Uncertainty, Springer, vol. 59(1), pages 85-124, August.
    4. Andrew Royal, 2017. "Dynamics in risk taking with a low-probability hazard," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 41-69, August.
    5. Mona Ahmadiani & Susana Ferreira & Craig E. Landry, 2019. "Flood Insurance and Risk Reduction: Market Penetration, Coverage, and Mitigation in Coastal North Carolina," Southern Economic Journal, John Wiley & Sons, vol. 85(4), pages 1058-1082, April.
    6. Carolyn Kousky & Erwann Michel-Kerjan, 2017. "Examining Flood Insurance Claims in the United States: Six Key Findings," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(3), pages 819-850, September.
    7. Meri Davlasheridze & Qing Miao, 2019. "Does Governmental Assistance Affect Private Decisions to Insure? An Empirical Analysis of Flood Insurance Purchases," Land Economics, University of Wisconsin Press, vol. 95(1), pages 124-145.
    8. Thomas Holzheu & Ginger Turner, 2018. "The Natural Catastrophe Protection Gap: Measurement, Root Causes and Ways of Addressing Underinsurance for Extreme Events†," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(1), pages 37-71, January.
    9. Carolyn Kousky, 2017. "Disasters as Learning Experiences or Disasters as Policy Opportunities? Examining Flood Insurance Purchases after Hurricanes," Risk Analysis, John Wiley & Sons, vol. 37(3), pages 517-530, March.
    10. Osberghaus, Daniel & Reif, Christiane, 2021. "How do different compensation schemes and loss experience affect insurance decisions? Experimental evidence from two independent and heterogeneous samples," Ecological Economics, Elsevier, vol. 187(C).
    11. Justin Gallagher & Daniel Hartley, 2017. "Household Finance after a Natural Disaster: The Case of Hurricane Katrina," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 199-228, August.
    12. Georgic, Will & Klaiber, H. Allen, 2022. "Stocks, flows, and flood insurance: A nationwide analysis of the capitalized impact of annual premium discounts on housing values," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    13. Andor, Mark A. & Osberghaus, Daniel & Simora, Michael, 2020. "Natural Disasters and Governmental Aid: Is there a Charity Hazard?," Ecological Economics, Elsevier, vol. 169(C).
    14. Lu Fang & Lingxiao Li & Abdullah Yavas, 2023. "The Impact of Distant Hurricane on Local Housing Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 327-372, February.
    15. Matthew Gibson & Jamie T. Mullins & Alison Hill, 2019. "Climate Risk and Beliefs: Evidence from New York Floodplains," Department of Economics Working Papers 2019-02, Department of Economics, Williams College.
    16. Erwann O. Michel-Kerjan, 2010. "Catastrophe Economics: The National Flood Insurance Program," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 165-186, Fall.
    17. Adachi, Daisuke & Nakata, Hiroyuki & Sawada, Yasuyuki & Sekiguchi, Kunio, 2023. "Adverse selection and moral hazard in corporate insurance markets: Evidence from the 2011 Thailand floods," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 376-386.
    18. Joakim A. Weill, 2023. "Flood Risk Mapping and the Distributional Impacts of Climate Information," Finance and Economics Discussion Series 2023-066, Board of Governors of the Federal Reserve System (U.S.).
    19. Markus Fels, 2020. "Mental Accounting, Access Motives, and Overinsurance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 675-701, April.
    20. Mark Browne & Christian Knoller & Andreas Richter, 2015. "Behavioral bias and the demand for bicycle and flood insurance," Journal of Risk and Uncertainty, Springer, vol. 50(2), pages 141-160, April.

    More about this item

    Keywords

    natural disasters; insurance demand; catastrophic risk; risk beliefs; heuristics;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:genrir:v:42:y:2017:i:2:d:10.1057_s10713-017-0021-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.