Is Imprecise Knowledge Better than Conflicting Expertise? Evidence from Insurers’ Decisions in the United States

27 Pages Posted: 1 Mar 2010

See all articles by Laure Cabantous

Laure Cabantous

Cass Business School, City University London

Denis Hilton

University of Toulouse

Howard Kunreuther

University of Pennsylvania - Wharton Risk Management and Decision Processes Center; National Bureau of Economic Research (NBER)

Erwann Michel-Kerjan

University of Pennsylvania - The Wharton School - Center for Risk Management

Date Written: February 24, 2010

Abstract

Testing whether risk professionals (here insurers) behave differently under risk and ambiguity when they cover catastrophic risks (floods and earthquakes) and non-catastrophic risks (fires), this paper reports the results of the first field experiment in the United States designed to distinguish two sources of ambiguity: imprecise ambiguity (outside experts agree on a range of probability, but not on any point estimate) versus conflict ambiguity (each expert group provides precise probability estimates which differ from one group to another). Insurers charge higher premiums when faced with ambiguity than when the probability of a loss is well specified. Furthermore they charge more for conflict ambiguity than imprecise ambiguity for flood and hurricane hazards, but less so in the case of fire. The source of ambiguity also impacts causal inferences insurers make to reduce their uncertainty.

Keywords: Ambiguity, Source of Uncertainty, Insurance Pricing, Decision-Making

JEL Classification: C93, D81, D83

Suggested Citation

Cabantous, Laure and Hilton, Denis and Kunreuther, Howard C. and Michel-Kerjan, Erwann, Is Imprecise Knowledge Better than Conflicting Expertise? Evidence from Insurers’ Decisions in the United States (February 24, 2010). Nottingham University Business School Research Paper No. 2010-04, Available at SSRN: https://ssrn.com/abstract=1558616 or http://dx.doi.org/10.2139/ssrn.1558616

Laure Cabantous (Contact Author)

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Denis Hilton

University of Toulouse ( email )

41 Allées Jules Guesde - CS 61321
TOULOUSE
France

Howard C. Kunreuther

University of Pennsylvania - Wharton Risk Management and Decision Processes Center ( email )

3819 Chestnut Street
Suite 130
Philadelphia, PA 19104
United States
215-898-4589 (Phone)

National Bureau of Economic Research (NBER)

Erwann Michel-Kerjan

University of Pennsylvania - The Wharton School - Center for Risk Management ( email )

Jon M Huntsman Hall, Suite 500
3730 Walnut Street
Philadelphia, PA 19104-6365
United States

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