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