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Firms Fight Risk

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Firms Fight Risk

Robin Hanson
Sep 12, 2011
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Firms Fight Risk

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To increase efforts to dealt with catastrophic risks, shift responsibility from individuals to firms:

Corporate demand for catastrophe coverage is actually more price inelastic than the demand for non-catastrophe coverage. … A 10% increase in price will reduce quantity of terrorism coverage by only 2.42% whereas it will reduce the quantity of property coverage by 2.91%. This result is in contrast to the findings with respect to individual insurance choices in laboratory experiments and empirical studies on homeowners insurance. …

The majority of homeowners do not purchase catastrophic coverage voluntarily and those cases that do obtain some coverage, exhibit a very elastic demand. … Typically, individuals either ignore those low-probability risks (optimism) or over-estimate them by focusing on possible outcomes without paying much attention to the likelihood of them happening (availability bias). Such bimodal distributions of behavior were also shown experimentally … analyzing actual long-term care insurance decisions by individuals. … Individuals tend to largely neglect risks with a very low probability. However, once a low-probability event takes place, the risk is back in their attention and individuals tend to overinsure against this risk. …

Even when the cost of insurance is subsidized, many people located in high risk areas
still do not purchase coverage. … Even those homeowners who purchased insurance against catastrophe risks (hurricane) exhibited a more price elastic demand for catastrophic risks than for non-catastrophe risks (fire). A related finding is that many individuals are willing to pay significantly more for non-catastrophe insurance than for catastrophe insurance. (more)

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Firms Fight Risk

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Firms Fight Risk

www.overcomingbias.com
Overcoming Bias Commenter
May 15

People don't get fired for small loses, but they do get fired for big losses.

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Overcoming Bias Commenter
May 15

If a person is reasonably wealthy, it is generally the cases that ONLY catastrophe insurance is a good purchase, in the sense that on the aggragate, the insurance buyer loses in terms of expected value (otherwise insurers would go broke) and the only rational reason to buy insurance is protection from losses that are catastrophic.

It makes much more sense to buy house insurance than car insurance. Buying laptop insurance for instance is ridiculous (except if are a few standard deviations above the norm in terms of recklessness and the insurance covers it even if you drop it). I don't have the data buy I'd bet that many electronics retailers and car rental companies derive a significant part of their income from insurance, because their margins are so high.

I've just seen the movie "Contagion", which is about epidemics, and the idea came to mind that drug companies can fund their research by selling the optionality of buying not-yet approved drugs when they do get approved, so you pay a small insurance premium to guarantee that you are first in line if there is a shortage of medicine of some kind. In other words, a good way to fund the protection of tail risks is to take money from people who worry about tail-risks and not have to convince people who ignore them that they should be worried and pay.

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