How do different compensation schemes and loss experience affect insurance decisions? Experimental evidence from two independent and heterogeneous samples

Natural hazard insurance is advocated as an important means of risk management, however, private insurance demand often remains below critical levels. Prior loss experience and the design of governmental relief schemes are two factors potentially influencing insurance decisions. We address these two elements in monetary incentivized experiments which include representations of natural hazard insurance schemes in Europe. The experiment reflects two possible designs of governmental relief schemes: partial but guaranteed relief and full but non-guaranteed relief. The risk of loss is kept constant over ten consecutive rounds to analyze the effect of loss experience. The experiment is administered twice: as a laboratory experiment with a student subject pool in Mannheim, Germany, and as an online experiment with citizens of flood-prone areas in the city of Dornbirn, Austria. In both samples, the design of the governmental relief scheme has no effect on insurance decisions. We find that prior loss experience adversely affects insurance decisions; uninsured subjects tend to remain un-insured after experiencing a loss, and previously insured subjects often switch to non-insurance in the rounds after the loss. These results have important implications for the design of flood insurance and flood risk communication.