Insurance Demand Anomalies and Regulation

Abstract

In recent years, it has become increasingly clear that risk aversion alone cannot explain individuals' demand for insurance. From the perspective of risk aversion, individuals tend to purchase insurance when they should not, refuse to purchase insurance when they should, prefer sub‐optimal payouts and allow irrelevant considerations to influence their insurance preferences. This article considers the normative implications of these insurance demand anomalies. It argues that while they are generally the result of consumer mistakes, they may also reflect sophisticated decision making. Given these conflicting explanations, the article explores a spectrum of “libertarian paternalistic” regulatory interventions in insurance markets.

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