An incentive-compatible experiment on probabilistic insurance and implications for an insurer‘s solvency level
- This paper is the first to conduct an incentive-compatible experiment using real monetary payoffs to test the hypothesis of probabilistic insurance which states that willingness to pay for insurance decreases sharply in the presence of even small default probabilities as compared to a risk-free insurance contract. In our experiment, 181 participants state their willingness to pay for insurance contracts with different levels of default risk. We find that the willingness to pay sharply decreases with increasing default risk. Our results hence strongly support the hypothesis of probabilistic insurance. Furthermore, we study the impact of customer reaction to default risk on an insurer’s optimal solvency level using our experimentally obtained data on insurance demand. We show that an insurer should choose to be default-free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level.
Author: | Anja ZimmerGND, Helmut GründlGND, Christian D. SchadeORCiDGND, Franca GlenzerGND |
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URN: | urn:nbn:de:hebis:30:3-771121 |
DOI: | https://doi.org/10.2139/ssrn.1949270 |
Series (Serial Number): | ICIR Working Paper Series (No. 6/11 [17.06.14]) |
Publisher: | International Center for Insurance Regulation |
Place of publication: | Frankfurt am Main |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2014 |
Year of first Publication: | 2014 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2024/04/11 |
Tag: | Behavioral Insurance; Probabilistic Insurance; Risk Management of Insurance Companies |
Edition: | June 17, 2014 |
Page Number: | 47 |
HeBIS-PPN: | 517269848 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |