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Journal of Risk and Uncertainty

, Volume 39, Issue 1, pp 17–44 | Cite as

Insurance decisions for low-probability losses

  • Susan K. Laury
  • Melayne Morgan McInnes
  • J. Todd Swarthout
Article

Abstract

It is widely accepted that individuals tend to underinsure against low-probability, high-loss events relative to high-probability, low-loss events. This conventional wisdom is based largely on field studies, as there is very little experimental evidence. We reexamine this issue with an experiment that accounts for possible confounds in prior insurance experiments. Our results are counter to the prior experimental evidence, as we observe subjects buying more insurance for lower-probability events than for higher-probability events, given a constant expected loss and load factor. Insofar as underinsurance for catastrophic risk is observed in the field, our results suggest that this can be attributed to factors other than only the relative probability of the loss events.

Keywords

Low-probability hazards Insurance Risk Experiments 

JEL Classification

C91 D80 

Notes

Acknowledgements

We thank seminar participants at Fordham University, Medical University of South Carolina, University of Michigan, and University of North Carolina at Charlotte. Funding was provided by the National Science Foundation (SBR-9753125 and SBR-0094800).

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Susan K. Laury
    • 1
  • Melayne Morgan McInnes
    • 2
  • J. Todd Swarthout
    • 1
  1. 1.Georgia State UniversityAtlantaUSA
  2. 2.University of South CarolinaColumbiaUSA

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