Revisiting the impact of contract nonperformance risk on individuals' willingness to pay - Experimental evidence

Abstract

An insurance contract may be nonperforming—resulting in a situation in which the insured might be worse off than without insurance since also losing the premium. This study revisits how contract nonperformance risk influences individuals’ willingness to pay (WTP) for insurance contracts. In an incentive-compatible laboratory experiment, subjects state their maximum WTP for different insurance contracts, which only differ in their inherent nonperformance risk. While the median WTP for no-default contracts is above the actuarially fair premium, both the mere existence of default risk and an increase in default risk decrease participants’ median WTP below the actuarially fair premia.

Keywords: Nonperformance risk, probabilistic insurance, behavioral insurance, individual decision-making, default risk

JEL Classification: C91, D12, D18, D81, D91, G22, G41