It is widely accepted that individuals tend to underinsure against low-probability, high-loss events relative to high-probability, low-loss events. This conventional wisdom is based largely on Öeld studies, as there is very little experimental evidence. We reexamine this issue with an experiment that accounts for possible confounds in prior insurance experiments. Our results are counter to the prior experimental evidence, as we observe subjects buying more insurance for low-probability events than the higher-probability events, given a constant expected loss and load factor. Our results suggest that, to the extent underinsurance for catastrophic risk is observed in the Öeld, it can be attributed to factors other than the relative probability of the loss events.
Laury, Susan; McInnes, Melayne; and Swarthout, Todd, "Insurance Purchase for Low-Probability Losses" (2008). ExCEN Working Papers. 101.