nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒11‒10
two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. On the Preference for Full-Coverage Policies: Why do People buy too much Insurance? By Zur Shapira; Itzhak Venezia
  2. Pinning Down the Value of Statistical Life By Thomas J. Kniesner; W. Kip Viscusi; Christopher Woock; James P. Ziliak

  1. By: Zur Shapira; Itzhak Venezia
    Abstract: One of the most intriguing questions in insurance is the preference of consumers for low or zero deductible insurance policies. This stands in sharp contrast to a theorem proved by Mossin, 1968, that under quite common assumptions when the price of insurance is higher than its actuarial value, then full coverage is not optimal. We show in a series of experiments that amateur subjects tend to underestimate the value of a policy with a deductible and that the degree of underestimation increases with the size of the deductible. We hypothesize that this tendency is caused by the anchoring heuristic. In particular, in pricing a policy with a deductible subjects first consider the price of a full coverage policy. Then they anchor on the size of the deductible and subtract it from the price of the full coverage policy. However, they do not adjust the price enough upward to take into account the fact that there is only a small chance that the deductible will be applied toward their payments. We also show that professionals in the field of insurance are less prone to such a bias. This implies that a policy with a deductible priced according to the true expected payments may seem “overpriced” to the insured and therefore may not be purchased. Since the values of full coverage policies are not underestimated the insured may find them as relatively better “deals”.
    Date: 2007–08
  2. By: Thomas J. Kniesner (Syracuse University and IZA); W. Kip Viscusi (Vanderbilt University); Christopher Woock (The Conference Board); James P. Ziliak (University of Kentucky)
    Abstract: Our research addresses fundamental long-standing concerns in the compensating wage differentials literature and its public policy implications: the econometric properties of estimates of the value of statistical life (VSL) and the wide range of such estimates from about $0.5 million to about $21 million. We address most of the prominent econometric issues by applying panel data, a new and more accurate fatality risk measure, and systematic selection of panel estimator in our research. Controlling for measurement error, endogeneity, individual heterogeneity, and state dependence yields both a reasonable average level and narrow range for the estimated value of a statistical life of about $5.5-$7.5 million.
    Keywords: VSL, panel data, fixed effects, random effects, PSID
    JEL: I10 J17 J28 K00
    Date: 2007–10

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