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Bounded Rationality, Climate Risks, and Insurance: Is There a Market for Natural Disasters?

  • W. J. Wouter Botzen
  • Jeroen C.J.M. van den Bergh

This paper examines the role of insurances to reduce uncertainty associated with climate change losses for individuals. Of special interest is the value individuals place on the reduction of increased flood risks by insurance coverage. Using rank-dependent utility and prospect theories, risk premiums are estimated under different climate change scenarios for the Netherlands. The study delivers two main insights. First, estimation results suggest that a profitable flood insurance market could be feasible. Second, climate change has the potential to increase the profitability of offering flood insurance.

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File URL: http://le.uwpress.org/cgi/reprint/85/2/265
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Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 85 (2009)
Issue (Month): 2 ()
Pages: 265-278

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Handle: RePEc:uwp:landec:v:85:y:2009:i:2:p:265-278
Contact details of provider: Web page: http://le.uwpress.org/

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  1. Brookshire, David S, et al, 1985. "A Test of the Expected Utility Model: Evidence from Earthquake Risks," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 369-89, April.
  2. Donkers, A.C.D. & Melenberg, B. & van Soest, A.H.O., 1999. "Estimating Risk Attitudes Using Lotteries; A Large Sample Approach," Discussion Paper 1999-12, Tilburg University, Center for Economic Research.
  3. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, 05.
  4. Wakker, Peter P, 2001. "Testing and Characterizing Properties of Nonadditive Measures through Violations of the Sure-Thing Principle," Econometrica, Econometric Society, vol. 69(4), pages 1039-59, July.
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