Default Options and Insurance Demand

39 Pages Posted: 24 Jun 2020

See all articles by Peter John Robinson

Peter John Robinson

VU University Amsterdam - Institute for Environmental Studies (IVM)

W.J.W. Botzen

VU University Amsterdam - Institute for Environmental Studies (IVM)

Howard Kunreuther

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

Shereen Chaudhry

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2020

Abstract

Default options may provide a low-cost way of influencing behaviour without modifying incentives and constraining choices between alternatives. However, an improved understanding is needed on whether they are effective when individuals have experience with making the choice in practice and have preferences for specific alternatives. We study whether defaults can be used to increase insurance coverage against low-probability/high-impact risks, like floods, and whether past flood insurance purchases and flooding experience moderate the effect of defaults. Our study uses a naturally occurring difference in experience, comparing the surveyed flood insurance choices of 1,187 homeowners, half of whom are in the Netherlands, where flood insurance penetration rates are low and recent flooding caused minor losses, and the other half of whom are in the United Kingdom (UK), where the opposite is true. We find defaults are effective among homeowners with little to no flood-related experience: in the Netherlands defaults increase the likelihood of insuring by between 17 and 18 percentage points. Although there is no overall effect of defaults in the UK, defaults increase flood insurance coverage for risk averse individuals, and those who have no reported previous flood experience and have not purchased flood insurance. Anticipated regret about not having insurance coverage in the event of a flood, and perceptions about the insurance cost explain between 34 and 37 percent of the relationship between the default and flood insurance demand. We discuss policy implications of our findings.

Keywords: Choice architecture, default options, experience, flood insurance demand, loss aversion

Suggested Citation

Robinson, Peter John and Botzen, W.J.W. and Kunreuther, Howard C. and Kunreuther, Howard C. and Chaudhry, Shereen, Default Options and Insurance Demand (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3616204 or http://dx.doi.org/10.2139/ssrn.3616204

Peter John Robinson

VU University Amsterdam - Institute for Environmental Studies (IVM) ( email )

De Boelelaan 1087
Amsterdam, 1081HV
Netherlands

W.J.W. Botzen (Contact Author)

VU University Amsterdam - Institute for Environmental Studies (IVM) ( email )

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

Howard C. Kunreuther

National Bureau of Economic Research (NBER)

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)

Shereen Chaudhry

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://www.chicagobooth.edu/faculty/directory/c/shereen-chaudhry

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