Ambiguity, Risk and Earthquake Insurance Premiums: An Empirical Analysis

Abstract

Synopsis Ambiguity of insurance payment in earthquake insurance can be one of main reasons of low purchase rate. We empirically investigate the influence of the ambiguity on the decision to buy hypothetical earthquake insurance and the relationship with individual characteristics based on MEU model using questionnaire data. The main results of this paper are summarized as follows. First, respondent’s preferences to the insurance with 1, 5, and 10% unreimbursement risk are generally inconsistent with expected utility theory. Second, respondents demanded more than 50% reduction in premium to offset each unreimbursement risk. Third, the ambiguity premium is larger in men who purchase earthquake insurance, have never received insurance payment, and distrust insurance companies than each correspondents, and increases with age, education level.

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