The Democrat Disaster: Hurricane Exposure, Risk Aversion and Insurance Demand

Abstract This article re-examines three standard results in the theory of insurance demand: (i) full coverage with a fair premium and partial coverage with an unfair premium; (ii) insurance is an inferior good under decreasing absolute risk aversion (DARA) and (iii) insurance may be a Giffen good under DARA. It has been shown recently that (i) holds for the class of insurance policies in which maximum coverage fully covers the potential loss. We show that whether (i) holds beyond this class of policies is indeterminate. In addition, we employ a unified framework to investigate the effects of changes in initial wealth and price. In particular, we show that both (ii) and (iii) hold for a certain class of insurance policies which include all commonly-used types of policies. The result also provides a unified treatment of several results in the extant literature.

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An Investigation of Residential Insurance Demand-side Reactions After a Natural Catastrophe: The Case of the 2010–11 Christchurch Earthquakes

Asia-Pacific Journal of Risk and Insurance ◽

10.1515/apjri-2016-0026 ◽

2017 ◽

Vol 11 (2) ◽

Author(s):

Richard Mumo ◽

Richard Watt

Keyword(s):

Risk Perception ◽

Risk Aversion ◽

Absolute Risk ◽

Insurance Coverage ◽

Major Effect ◽

Side Reactions ◽

Demand Side ◽

Insurance Demand ◽

Insurance Cover ◽

Premium Rates

AbstractThis study gives an empirical analysis of residential insurance demand-side reactions after an earthquake disaster using survey data. The paper discussed the study hypothesis from economic analysis perspective with significance econometric tests to explain how insurance demand for residential property changed post-catastrophe. Our empirical results observe higher risk perception from those who have had prior experience of catastrophes than those who have not. This positively influence the demand for residential insurance cover in the aftermath of a natural disaster with higher demand observed in the regions with higher seismic risk. These results support the research hypothesis and are consistent with the findings in our literature. A change in insurance level is less likely when the cost of the insurance is high, when the expected loss is low, and individuals becomes wealthier. We also find evidence of effects that remain to be explained, such as the greater sensitivity to both cost of insurance coverage and risk perception than to the size of the potential loss. We observe a positive relationship between household characteristics and the degree of risk aversion and how this changes with change in level of income, change in value of insured assets and change in insurance premiums. An increase in individual’s income alone has no major effect on insurance demand if the premium rates are within the demanders’ price range. However, positive loading of premiums to reflect transaction costs and possibility of adverse selection might affect insurance coverage level if premium rates become too high. In such cases, the direction of the effect depends on whether an increase in income increases both the premium rates and the insured asset and on whether the insurance demander has increasing or decreasing absolute risk aversion.

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Insurance demand, the elasticity of risk aversion, and relative prudence: a further result

OR Spectrum ◽

10.1007/s00291-004-0160-z ◽

2004 ◽

Vol 26 (3) ◽

pp. 441-446 ◽

Cited By ~ 5

Author(s):

Thomas Eichner ◽

Andreas Wagener

Keyword(s):

Risk Aversion ◽

Insurance Demand

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Does financial literacy make the difference in non-life insurance demand among European countries?

Ekonomski pregled ◽

10.32910/ep.71.4.3 ◽

2020 ◽

Vol 71 (4) ◽

pp. 359-382

Author(s):

Marijana Ćurak ◽

Sandra Pepur ◽

Dujam Kovač

Keyword(s):

Risk Aversion ◽

Life Insurance ◽

Financial Literacy ◽

Panel Data Analysis ◽

European Countries ◽

General Level ◽

Insurance Demand ◽

Life Insurance Demand ◽

The Difference ◽

The Impact

While risk aversion and affordability of insurance are considered as the most important determinants of non-life insurance demand, understanding and knowledge of complex non-life insurance products are less researched. Studies on insurance demand conducted at the cross-section level, which include education, usually use it as a proxy for risk aversion and to a limited extent as a measure of financial literacy. Moreover, the general level of education does not accurately reflect the level of understanding of sophisticated insurance instruments. Consequently, the main aim of this research is to analyse the impact of financial literacy on the demand for non-life insurance by applying a more precise measure of financial literacy. The empirical analysis is based on the dataset of 38 European countries in the period from 2010 to 2016 and is done using the panel data analysis technique. Research findings confirm that financial literacy makes the difference in non-life insurance demand among European countries, while controlling for other economic, social/cultural, market structure and institutional determinants of non-life insurance demand. The paper contributes to the literature on non-life insurance demand, especially the one on the relationship between financial literacy and the demand for non-life insurance.

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