Demand for Multi-Year Insurance: Experimental Evidence

Established in 1984, the Wharton Risk Management and Decision Processes Center develops and promotes effective corporate and public policies for low‐probability events with potentially catastrophic consequences through the integration of risk assessment, and risk perception with risk management strategies. Natural disasters, technological hazards, and national and international security issues (e.g., terrorism risk insurance markets, protection of critical infrastructure, global security) are among the extreme events that are the focus of the Center's research. The Risk Center's neutrality allows it to undertake large‐scale projects in conjunction with other researchers and organizations in the public and private sectors. Building on the disciplines of economics, decision sciences, finance, insurance, marketing and psychology, the Center supports and undertakes field and experimental studies of risk and uncertainty to better understand how individuals and organizations make choices under conditions of risk and uncertainty. Risk Center research also investigates the effectiveness of strategies such as risk communication, information sharing, incentive systems, insurance, regulation and public‐private collaborations at a national and international scale. From these findings, the Wharton Risk Center's research team – over 50 faculty, fellows and doctoral students – is able to design new approaches to enable individuals and organizations to make better decisions regarding risk under various regulatory and market conditions. The Center is also concerned with training leading decision makers. It actively engages multiple viewpoints, including top‐level representatives from industry, government, international organizations, interest groups and academics through its research and policy publications, and through sponsored seminars, roundtables and forums. Do individuals prefer a fixed-price multi-year insurance (MYI) policy to current annual contracts with fluctuating prices? This question is addressed through a web-based experiment with 445 adults to determine demand for such a multi-year contract with significant real money at stake. In a repeated 2-period game, individuals have an opportunity to purchase one-period insurance contracts, two-period contracts or no insurance against the risk of a hurricane causing damage to their property. When premiums for both insurance options are actuarially fair, we find that more than five times as many people favor the 2-period contract over the 1-period one. The demand for a 2-period contract remains high even when it has a loading cost of 5 percent and 10 percent and the 1-period premium is actuarially fair. Given the lack of insurance purchase for catastrophe risks observed in empirically studies, these findings support the development of new and more attractive contracts.