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Neglecting Disaster: Why Don't People Insure Against Large Losses?

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Abstract

This paper provides a theoretical explanation for the common observation that people often fail to purchase insurance against low-probability high-loss events even when it is offered at favorable premiums. We hypothesize that individuals maximize expected utility but face an explicit or implicit cost to discovering the true probability of rare events. This cost constitutes a threshold that may inhibit purchase but may be offset in several ways by suppliers of insurers and state regulators.

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Authors and Affiliations

  1. Department of Operations and Information Management, The Wharton School, University of Pennsylvania, 563 Jon M. Huntsman Hall, Philadelphia, PA, 19104

    Howard Kunreuther

  2. Department of Health Care Systems, The Wharton School, University of Pennsylvania, Room 208 Colonial Penn Center, 3641 Locust Walk, Philadelphia, PA, 19104

    Mark Pauly

Authors
  1. Howard Kunreuther
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  2. Mark Pauly
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Correspondence to Mark Pauly.

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Kunreuther, H., Pauly, M. Neglecting Disaster: Why Don't People Insure Against Large Losses?. Journal of Risk and Uncertainty 28, 5–21 (2004). https://doi.org/10.1023/B:RISK.0000009433.25126.87

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  • DOI: https://doi.org/10.1023/B:RISK.0000009433.25126.87

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