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The Demand for Homeowners Insurance with Bundled Catastrophe Coverage

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  • Martin F. Grace
  • Robert W. Klein
  • Paul R. Kleindorfer

Abstract

This paper analyzes the demand for homeowners insurance in markets subject to catastrophe losses and where consumers have choices in configuring their coverage for catastrophe and non-catastrophe perils. We estimate the demand for homeowner insurance in Florida and New York using two-stage least squares regression with advisory indicated loss costs as our proxy for the quantity of real insurance services demanded. We decompose the demand for insurance into the demand for coverage of catastrophe perils (i.e., hurricanes or windstorms) and the demand for non-catastrophe coverage and estimate these demand functions separately. Our results are relatively consistent in New York and Florida, including evidence that catastrophe demand is more price elastic than non-catastrophe demand. We also find evidence that consumers value options that expand coverage, buy more insurance when it is subsidized through regulatory price constraints, and consider state guaranty fund provisions when purchasing insurance.

Suggested Citation

  • Martin F. Grace & Robert W. Klein & Paul R. Kleindorfer, 2002. "The Demand for Homeowners Insurance with Bundled Catastrophe Coverage," Center for Financial Institutions Working Papers 02-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:02-06
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    References listed on IDEAS

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    1. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    2. Paul Kleindorfer & Howard Kunreuther, 1999. "Challenges Facing the Insurance Industry in Managing Catastrophic Risks," NBER Chapters, in: The Financing of Catastrophe Risk, pages 149-194, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Huber, Michael, 2004. "Reforming the UK flood insurance regime. The breakdown of a gentlemen's agreement," LSE Research Online Documents on Economics 36049, London School of Economics and Political Science, LSE Library.
    2. Huber, Michael, 2002. "Conceptualising Insurance: risk management under conditions of solvency," LSE Research Online Documents on Economics 35991, London School of Economics and Political Science, LSE Library.
    3. Alexander Harin, 2004. "Arrangement infringement possibility approach: some economic features of large-scale events," Economics Bulletin, AccessEcon, vol. 28(11), pages 1.

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