Risk aversion during adverse economic events

Insurers are trusted to manage clients’ risks, yet this trust can be compromised during adverse economic situations when people are more risk averse. Unlike previous studies that used potentially biased self-reported or proxy measures of risk aversion, we use actual risk-taking behavior by financial market participants in 33 OECD countries to examine the link between risk aversion and demand for non-life insurance during normal and adverse economic conditions. To correct estimation errors, we employ bias corrected bootstrapping techniques to generate efficient regression estimates, and Least Square Dummy Variables (LSDV), Instrumental variable (IV), and Generalized Methods of Moments (GMM) regression techniques. We find that when economy is functioning normally, risk averse individuals/corporations seek non-life insurance to cushion themselves from transactions and bankruptcy costs. Our results also show that in the event of economic impairment, individuals’ confidence in the financial system declines, making them seek private arrangements.