Contract Nonperformance Risk and Uncertainty in Insurance Markets

71 Pages Posted: 30 Jan 2017 Last revised: 9 May 2019

See all articles by Christian Biener

Christian Biener

Institute of Insurance Economics, University of St. Gallen; University of St. Gallen - School of Finance

Andreas Landmann

Paris School of Economics (PSE)

Maria Isabel Santana

University of Mannheim - Department of Economics

Date Written: January 30, 2017

Abstract

Insurance contracts may fail to perform, leading to a default on valid claims. We relax the standard assumption of known probabilities for such defaults by allowing for uncertainty. Within a large behavioral experiment, we show that introducing risk and uncertainty each leads to significant reductions in insurance demand and that the effects are comparable in magnitude (17.1 and 14.5 percentage points). Furthermore, risk- and ambiguity-averse participants are affected most. These findings are in line with models incorporating ambiguity attitudes or, alternatively, pessimistic beliefs. An analysis of the belief and decision dynamics suggests persistent pessimistic priors and disregard of peer experiences, leading to a stable uncertainty effect.

JEL Classification: D03, D81, D83, G22

Suggested Citation

Biener, Christian and Landmann, Andreas and Santana, Maria Isabel, Contract Nonperformance Risk and Uncertainty in Insurance Markets (January 30, 2017). University of St.Gallen, School of Finance Research Paper No. 2017/1. Available at SSRN: https://ssrn.com/abstract=2908072 or http://dx.doi.org/10.2139/ssrn.2908072

Christian Biener (Contact Author)

Institute of Insurance Economics, University of St. Gallen ( email )

Girtannerstrasse 6
St. Gallen, St. Gallen 9010
Switzerland

HOME PAGE: http://sites.google.com/site/bienerresearchprofile/

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Andreas Landmann

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Maria Isabel Santana

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

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