Explaining the Failure to Insure Catastrophic Risks
AbstractIt has often been observed that homeowners fail to purchase disaster insurance. Explanations have ranged from behavioural biases to information search costs. We show that the decision to forego disaster insurance may be quite rational. Solvency-constrained insurers are required to have access to enough capital to cover a particular percentile of their aggregate loss distribution. When insuring risks with loss distributions characterised by fat tails, micro-correlations or tail dependence, insurers need to charge a price that is many times the expected loss in order to meet their solvency constraint. Homeowners, facing a budget constraint and a constraint that their utility with insurance exceeds that without it, may find the required loadings too high to make insurance purchase an optimal decision.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.
Volume (Year): 37 (2012)
Issue (Month): 2 (April)
Contact details of provider:
Web page: http://www.palgrave-journals.com/
Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Kousky, Carolyn, 2012. "Informing Climate Adaptation: A Review of the Economic Costs of Natural Disasters, Their Determinants, and Risk Reduction Options," Discussion Papers dp-12-28, Resources For the Future.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elizabeth Gale).
If references are entirely missing, you can add them using this form.