Skip to main content Accessibility help
×
Home
Hostname: page-component-5c569c448b-bmzkg Total loading time: 0.386 Render date: 2022-07-03T08:06:06.878Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "useNewApi": true } hasContentIssue true

4 - Behavior Consistent with Benchmark Models

Published online by Cambridge University Press:  05 February 2013

Howard C. Kunreuther
Affiliation:
University of Pennsylvania
Mark V. Pauly
Affiliation:
University of Pennsylvania
Stacey McMorrow
Affiliation:
The Urban Institute
Get access

Summary

Now that we have described the types of demand and supply anomalies relative to the benchmark models, we analyze several real-world insurance markets to illustrate when behavior would be classified as anomalous. At the heart of that determination are two questions:

  • Do consumers make decisions regarding insurance purchases consistent with the expected utility model?

  • Do insurers set premiums in competitive markets (without price regulation) so as to maximize expected profits?

RELEVANT ASSUMPTIONS FOR EXAMINING BEHAVIOR

Answers to these two questions are simplest in situations with well-specified and well-known loss probabilities and an insurance market that has the following characteristics:

  • A substantial number of at-risk individuals whose losses are independent of one another;

  • Loss amount per event that is large relative to buyers’ wealth but small relative to insurers’ capital;

  • Low costs to consumers for becoming well informed about potential losses;

  • Freedom of consumers to decide whether to buy insurance and, if so, how much coverage to purchase;

  • Free entry by insurers, with freedom to set premiums.

Type
Chapter
Information
Insurance and Behavioral Economics
Improving Decisions in the Most Misunderstood Industry
, pp. 51 - 66
Publisher: Cambridge University Press
Print publication year: 2013

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×