How Does Ambiguity Affect Insurance Decisions
Abstract
This paper deals with effects of ambiguity on insurance decisions. After citing real-life situations where ambiguity about probability and/or losses would appear to have affected insurance decisions, we outline effects of ambiguity on insurers predicted by the expected utility model and contrast these with predictions implied by descriptive models of how actuaries and underwriters make decisions. In terms of prices, the principal difference between the two sets of predictions is when losses are perfectly correlated and probabilities are ambiguous. We illustrate effects of ambiguity on insurance decisions using data from two surveys, one of actuaries (Hogarth & Kunreuther 1989a; 1989b), the other of underwriters. The former deals only with ambiguity concerning probabilities, the latter with ambiguity concerning both probabilities and losses. The main conclusion is that matters in terms of quoted prices for insurance. Moreover, at a descriptive level it appears that decision makers utilize heuristics that may lead to different prices than implied by standard economic theory. Finally, we emphasize the need to research how processes within insurance firms (including types of interactions between actuaries and underwriters) as well as institutional aspects of insurance markets combine, in the presence of ambiguity, to affect the supply of insurance. (cp)
Document Details
- Document Type
- Technical Report
- Publication Date
- May 01, 1990
- Accession Number
- ADA225707
Entities
People
- Howard Kunreuther
- Robin M. Hogarth
Organizations
- University of Chicago