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An Econometric Model Based on the Maxmin Expected Utility Model: An Application to Earthquake Insurance

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Managing Safety of Heterogeneous Systems

Part of the book series: Lecture Notes in Economics and Mathematical Systems ((LNE,volume 658))

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Abstract

This study empirically investigates the influence of ambiguity on consumers’ decision to buy a hypothetical earthquake insurance policy. Using survey data, it identifies effects of specific consumer characteristics on their decision based on the Maxmin Expected Utility (MEU) model. We develop an econometric model consistent with the MEU model derived from axioms. Our study provides three main results: First, respondents’ preferences for the insurance when faced with 1%, 5%, and 10% appraisal risk are generally inconsistent with expected utility theory. Second, respondents demanded more than a 10% reduction in insurance premium as compensation for accepting each tier of appraisal risk. Third, the required discount is greatest among men who had previously purchased earthquake insurance and had experienced earthquake damage to their houses, and the required discount increases with age and education.

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Acknowledgements

We thank Professor Markku Kallio for reading the draft and making many helpful suggestions. Helpful comments from anonymous reviewers and participants at the December 2009 CwU Workshop are also acknowledged.

Author information

Authors and Affiliations

  1. Graduate School of Science and Technology, Kumamoto University, Kumamoto, Japan

    Toshio Fujimi

  2. Disaster Prevention Research Institute, Kyoto University, Kyoto, Japan

    Hirokazu Tatano

Authors
  1. Toshio Fujimi
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  2. Hirokazu Tatano
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Corresponding author

Correspondence to Toshio Fujimi .

Editor information

Editors and Affiliations

  1. Applied Systems Analysis (IIASA), International Institute for, SchloĂźplatz 1, Laxenburg, 2361, Austria

    Yuri Ermoliev

  2. Applied Systems Analysis (IIASA), International Institute for, SchloĂźplatz 1, Laxenburg, 2361, Austria

    Marek Makowski

  3. Aerospace Engineering and, Technology, Federal Armed Forces University Munich, Werner-Heisenberg-Weg 39, Neubiberg/MĂĽnchen, 85577, Germany

    Kurt Marti

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Fujimi, T., Tatano, H. (2012). An Econometric Model Based on the Maxmin Expected Utility Model: An Application to Earthquake Insurance. In: Ermoliev, Y., Makowski, M., Marti, K. (eds) Managing Safety of Heterogeneous Systems. Lecture Notes in Economics and Mathematical Systems, vol 658. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-22884-1_5

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