Insurance decisions under nonperformance risk and ambiguity

An important societal problem is that people underinsure against risks that are unlikely or occur in the far future, such as natural disasters and long-term care needs. One explanation is that uncertainty about the risk of non-reimbursement induces ambiguity averse and risk prudent decision makers to take out less insurance. We set up an insurance experiment to test this explanation. Consistent with the theoretical predictions, we find that the demand for insurance is lower when the nonperformance risk is ambiguous than when it is known and when decision makers are risk prudent. We cannot attribute the lower take-up of insurance to our measure of ambiguity aversion, probably because ambiguity attitudes are richer than aversion alone.

Automated summary

People tend to underinsure against unlikely or future risks like natural disasters due to uncertainty and risk aversion. A study found that demand for insurance is lower when the risk of non-reimbursement is ambiguous and decision makers are risk prudent. The lower take-up of insurance cannot be solely attributed to ambiguity aversion, as ambiguity attitudes are more complex.