Emerald Management Review:
On the preference for full-coverage policies: why do people buy too much insurance

Abstract:

Purpose - To explain why consumers pay more for their general insurance than they need to.

Design/methodology/approach - Experiments on 86 Israeli MBA insurance students, well acquainted with pricing decisions if not with purchasing, Asks subjects to price a full-cover policy, and a policy with an exclusion (deductible) (which would generate lower profits), in a simulated market with partly inelastic demand, as well as claims and damages. Compares the prices set by subjects and the true expected values of payments under the policies. Adds a study of 39 US executive MBA students, where the exclusion value was varied between two groups, and 26 Israeli insurance professionals. Surveys 43 MBA students about their choice of policy

Findings - Finds that the subjects underpriced the policies with exclusions significantly, while pricing the full policies closer to the true expected values. Notes the US sample mispriced the higher exclusion more, and overcharged for full cover and underpriced the policy with exclusion, Shows that only a quarter of professionals underpriced the policy with exclusions. Reports the students underpriced the policies with exclusions.

Research limitations/implications - Proposes study of bounded rationality and inability to compute as explanations, beyond achoring.

Practical implications - Focuses on the common error in valuation, where the cost of the exclusion is equated with the reduction in expected payments, whereas in fact the reduction is much less. Shows that even professionals understand the implications of exclusions.

Originality/value - Should interest many poor economists and students.

Keywords:

Article Type:

Research paper

Reference:

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