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Experimental Studies in Microinsurance Markets
Type
fundamental research project
Start Date
01 October 2012
End Date
31 March 2015
Status
ongoing
Keywords
Behavioral Economics
Insurance Demand
Developing Countries
Impact
Microinsurance
Description
Insurance solutions for low-income people - microinsurance - have attracted significant attention from academics and practitioners in several fields. Microinsurance is mainly found in developing countries with a very distinct target population, i.e., the low-income population. Research in development and health economics shows significant impact of microinsurance including society-wide effects. In a historical context, the evolution of microinsurance tracks that of the early twentieth- century insurance markets, e.g., in Northern America, in that formal risk-coping strategies arise to replace or complement the mutual informal assistance schemes of social groups that have been the sole means of coping with risk up to that time.
Development economics and policy sees microinsurance as a potential way of reducing poverty. The insurance industry is interested in the new and potentially large markets. From both perspectives, the success of microinsurance is largely driven by reaching sufficient scale and thus increasing demand. On the supply side, however, financial viability is usually not realized and the value of microinsurance solutions is extremely hard to communicate on the demand side. As of 2009, Lloyd's estimates that only 5 % of the potential microinsurance market has been penetrated. Recent research in this field finds that the relatively low level of demand is a key problem for development of microinsurance markets. The reasons for these low levels of demand, however, are not sufficiently understood and only recently have important factors such as insurance literacy and risk aversion been analyzed. The primary motivation for this research project is thus to better understand the currently low levels of insurance demand as reflected by low willingness to pay by low-income populations around the globe. We aim to contribute to a better understanding of the decision to buy or not to buy microinsurance by means of four research papers from the field of behavioral insurance and using an experimental research design.
Development economics and policy sees microinsurance as a potential way of reducing poverty. The insurance industry is interested in the new and potentially large markets. From both perspectives, the success of microinsurance is largely driven by reaching sufficient scale and thus increasing demand. On the supply side, however, financial viability is usually not realized and the value of microinsurance solutions is extremely hard to communicate on the demand side. As of 2009, Lloyd's estimates that only 5 % of the potential microinsurance market has been penetrated. Recent research in this field finds that the relatively low level of demand is a key problem for development of microinsurance markets. The reasons for these low levels of demand, however, are not sufficiently understood and only recently have important factors such as insurance literacy and risk aversion been analyzed. The primary motivation for this research project is thus to better understand the currently low levels of insurance demand as reflected by low willingness to pay by low-income populations around the globe. We aim to contribute to a better understanding of the decision to buy or not to buy microinsurance by means of four research papers from the field of behavioral insurance and using an experimental research design.
Leader contributor(s)
Member contributor(s)
Landmann, Andreas
Partner(s)
Chair of Econometrics, University of Mannheim, Germany
Funder(s)
Topic(s)
Behavioral Economics
Insurance Demand
Developing Countries
Impact
Microinsurance
Method(s)
Experimental Research
Range
HSG Internal
Range (De)
HSG Intern
Division(s)
Eprints ID
216932
2 results
Now showing
1 - 2 of 2
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PublicationContract Nonperformance Risk and Uncertainty in Insurance MarketsInsurance contracts may fail to perform, leading to a default on valid claims. We relax the standard assumption of known probabilities for such defaults by allowing for uncertainty. Within a large behavioral experiment, we show that introducing risk and uncertainty each leads to significant reductions in insurance demand and that the effects are comparable in magnitude (17.1 and 14.5 percentage points). Furthermore, risk- and ambiguity-averse participants are affected most. These findings are in line with models incorporating ambiguity attitudes or, alternatively, pessimistic beliefs. An analysis of the belief and decision dynamics suggests persistent pessimistic priors and disregard of peer experiences, leading to a stable uncertainty effect.Type: journal articleJournal: Journal of Public EconomicsVolume: 175Issue: 2019
Scopus© Citations 10 -
PublicationCan Group Incentives Alleviate Moral Hazard? The Role of Pro-Social PreferencesIncentivizing unobservable effort in risky environments, such as in insurance, credit, and labor markets, is vital as moral hazard may otherwise cause significant welfare losses including the outright failure of markets. Ensuring incentive-compatibility through state-contingent contracts between principal and agent, however, is undesirable for risk-averse agents. We provide a theoretical intuition on how pro-social preferences between agents in a joint liability group con-tract can ensure incentive-compatibility. Two independent large-scale behavioral experiments framed in an insurance context support the hypotheses derived from our theory. In particular, effort decreases when making agents’ payoff less state-dependent, but this effect is mitigated with joint liability in a group scheme where agents are additionally motivated by pro-social concerns. Activating strategic motives slightly increases effort further; particularly in non-anonymous groups with high network strength. The results support existing evidence on joint liability groups and further suggest that even if peer pressure to ensure effort provision is absent, such group policies can improve efficiency when agents are pro-social.Type: journal articleJournal: European Economic ReviewVolume: 101
Scopus© Citations 11