The Effect of Pre-commitment and Past-Experience on Insurance Choices: An Experimental Study

This paper reports results from an experimental study that investigates insurance behaviors in low-probability, high-loss risk situations. The study reveals that insurance behaviors may depend on the length of the commitment period of insurance policies, namely the period during which individuals commit themselves to maintain the same insurance decision. The results of this study also seem to support the predictions of the Dual Theory concerning the demand for co-insurance policies, that is to say the preference of individuals for extreme (null or full) levels of insurance coverage. This study also suggests that prior risk occurrences influence subsequent insurance choices. The paper provides a new possible explanation about the puzzling fact that people usually fail to obtain insurance against disaster-type risks such as natural disasters, even when premiums are close to actuarially fair levels.