Book contents
- Frontmatter
- Contents
- Preface
- Acknowledgments
- Part I Contrasting Ideal and Real Worlds of Insurance
- Part II Understanding Consumer and Insurer Behavior
- Part III The Future of Insurance
- 10 Design Principles for Insurance
- 11 Strategies for Dealing with Insurance-Related Anomalies
- 12 Innovations in Insurance Markets through Multiyear Contracts
- 13 Publicly Provided Social Insurance
- 14 Conclusions – A Framework for Prescriptive Recommendations
- Notes
- Glossary
- Bibliography
- Author Index
- Subject Index
10 - Design Principles for Insurance
Published online by Cambridge University Press: 05 February 2013
- Frontmatter
- Contents
- Preface
- Acknowledgments
- Part I Contrasting Ideal and Real Worlds of Insurance
- Part II Understanding Consumer and Insurer Behavior
- Part III The Future of Insurance
- 10 Design Principles for Insurance
- 11 Strategies for Dealing with Insurance-Related Anomalies
- 12 Innovations in Insurance Markets through Multiyear Contracts
- 13 Publicly Provided Social Insurance
- 14 Conclusions – A Framework for Prescriptive Recommendations
- Notes
- Glossary
- Bibliography
- Author Index
- Subject Index
Summary
We have seen that both buyer and seller behavior in a number of insurance markets is sometimes anomalous when judged by the two benchmark models (expected utility and expected profit maximization). Although buyers and sellers have managed to create and use insurance markets to provide sufficient protection against many of the most important threats to wealth, coverage is limited for some types of risks where the losses can be significant, such as earthquake risk.
Some insurance prices in the market are high relative to the expected loss, such as rental car or renters’ insurance. At the other extreme, buyers sometimes purchase coverage against events that have low financial consequences, such as the failure of an appliance, where the expected loss is considerably less than the price of insurance. Sometimes they fail to buy coverage against a catastrophic event, even at very favorable premiums. When such anomalous behavior occurs, what, if anything, should be done to correct it? Are there government regulations, subsidies, or other actions that might be appropriate? What role can insurers themselves play in the process?
- Type
- Chapter
- Information
- Insurance and Behavioral EconomicsImproving Decisions in the Most Misunderstood Industry, pp. 185 - 207Publisher: Cambridge University PressPrint publication year: 2013