Can We Nudge Insurance Demand by Bundling Natural Disaster Risks with Other Risks?

Abstract

Natural disaster risk is predicted to increase worldwide because of climate change. Insurance may be purchased to provide individuals financial resilience against the damages caused by disasters, however a key question for policymakers is whether disaster insurance penetration rates are impacted by including this coverage in a bundled policy alongside other perils rather than as a separate policy. We examine this question with data collected in an online experiment among 597 homeowners in the Netherlands and the United Kingdom (UK). Our findings show that demand is overall higher to insure separate risks than to cover all risks together in a bundled insurance policy in the UK, whereas no significant difference is found between demand for bundled insurance and single policy insurance in the Netherlands. This difference in preference across the two countries is partly associated with whether individuals have been flooded in the past, which is more often the case in the UK than the Netherlands. Our findings are also in line with several theoretical predictions according to expected utility theory, that risk aversion predicts aversion to more variant potential loss outcomes. Based on our results we suggest recommendations for policymaking and future research on this topic.

Keywords: Bundled insurance, economic experiment, expected utility theory, natural disasters, nudge.