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Uncertainty and the Demand for Insurance

Author

Listed:
  • Gandhi, Amit

    (University of Pennsylvania & Abnb)

  • Samek, Anya

    (University of California, San Diego)

  • Serrano-Padial, Ricardo

    (School of Economics)

Abstract

We survey a representative sample of US households to evaluate the impact of uncertainty about underlying risks on insurance demand. We find that uncertainty increases demand, individuals switch from risk averse to risk loving as risks become larger, and risk and uncertainty aversion are negatively correlated. We propose uncertainty preferences exhibiting probability weighing that can explain our data. We estimate the distribution of preferences in the population and find substantial heterogeneity and overweighing (underweighting) of small (large) probabilities. Our work highlights the need to account for uncertainty in insurance markets and suggests ways to do so even with limited data.

Suggested Citation

  • Gandhi, Amit & Samek, Anya & Serrano-Padial, Ricardo, 2021. "Uncertainty and the Demand for Insurance," School of Economics Working Paper Series 2021-3, LeBow College of Business, Drexel University, revised 17 Dec 2021.
  • Handle: RePEc:ris:drxlwp:2021_003
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    More about this item

    Keywords

    risk; uncertainty; ambiguity; insurance; compound risk; probability weighting; incentivized survey;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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