Uncertainty and Welfare in Insurance Markets

48 Pages Posted: 15 Apr 2023

See all articles by Amit Gandhi

Amit Gandhi

Airbnb

Anya Samek

University of California, San Diego (UCSD) - Rady School of Management; Center for Economic and Social Research (CESR)

Ricardo Serrano-Padial

Drexel University, School of Economics

Abstract

Technological advances in the insurance industry mean that insurers now may be better informed about underlying risks faced by individual consumers than consumers themselves. We evaluate the impact of these information frictions on welfare by combining demand elicitation surveys with insurance claim data. As expected, we find an ‘uncertainty premium’ -i.e., consumers are willing to pay more for insurance when risks are uncertain. Interestingly, we find that the uncertainty premium is negatively correlated with risk aversion at all sizes and probabilities of risks. This leads to a selection effect: individuals who purchase insurance are not necessarily the most risk averse. We show that the resulting misallocation of insurance leads to large welfare losses.

Keywords: D12, D14, D81, G22, J33

Suggested Citation

Gandhi, Amit and Samek, Anya and Serrano-Padial, Ricardo, Uncertainty and Welfare in Insurance Markets. Available at SSRN: https://ssrn.com/abstract=4419553 or http://dx.doi.org/10.2139/ssrn.4419553

Amit Gandhi

Airbnb ( email )

888 Brannan St
San Francisco, CA 94103
United States

Anya Samek (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive #0553
Rady School of Management
La Jolla, CA 92093-0553
United States

HOME PAGE: http://anyasamek.com

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

Ricardo Serrano-Padial

Drexel University, School of Economics ( email )

3220 Market St
Philadelphia, PA 19104
United States

HOME PAGE: http://www.serrano-padial.com

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