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Willingness to Pay for Low Probability, Low Loss Hazard Insurance

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The price of the evacuation insurance is $p each hurricane season. ... majority of respondents would not purchase the product at even the lowest price ... – PowerPoint PPT presentation

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Title: Willingness to Pay for Low Probability, Low Loss Hazard Insurance


1
Willingness to Pay for Low Probability, Low Loss
Hazard Insurance
  • John C. Whitehead
  • Department of Economics
  • Appalachian State University

Thanks to Bob Edwards, John Maiolo, Marieke Van
Willigan, Ken Wilson and Claudia Williams for
their contributions to this research and Jamie
Brown Kruse for comments. A previous version of
this paper was presented at the Southern Economic
Association Annual Meetings in Washington, DC,
November 2005 and the American Meteorological
Society Annual Meetings in Atlanta, GA, February
2006.
2
Evacuation Cost Insurance
Analysis of behavior and policy prescriptions
would not be such a problem if low probability
natural disasters had small consequences.
-- Ganderton et al. 2000, page 272.
3
Literature
  • McClelland, Schulze and Coursey (1993)
  • Ganderton et al. (2000)
  • Ozdemir (2005)
  • Burrus, Dumas and Graham (2005)

4
Data
  • March 2001 telephone survey
  • Response rate 73 (n 411)
  • Most respondents had experienced one or more
    hurricanes (n 384)
  • 50 evacuated for at least one storm

5
(No Transcript)
6
Empirical Model
7
Dependent Variable
  • Many people in coastal areas are safer if they
    evacuate their home before a hurricane strikes.
    But evacuating can cost a lot of time, money and
    lost income. Some people would rather stay at
    home during a hurricane so that they dont spend
    money and lose income. To reduce this problem and
    increase safety, one plan is to have a hurricane
    evacuation insurance policy to reimburse people
    for the costs of evacuation.

8
Willingness to Pay
  • Suppose you could purchase a hurricane evacuation
    insurance policy from an insurance agent before
    the next hurricane season. The price of the
    evacuation insurance is p each hurricane season.
    With insurance, you would be reimbursed for all
    of your evacuation expenses throughout the
    hurricane season. This would include
    reimbursement for travel, lodging, food, medical
    costs and lost income. Do you think you would
    purchase the hurricane evacuation insurance
    policy?

9
YES
  • 51 very sure, 44 somewhat sure, 3 not
    sure at all

10
Independent Variables
  • Policy price p
  • Evacuation probability r S (? p )
  • Evacuation cost c
  • Factors affecting evacuation

11
Willingness to Pay Models
Had Evacuated for a Recent Hurricane Had Evacuated for a Recent Hurricane Had Evacuated for a Recent Hurricane Had Evacuated for a Recent Hurricane Had Not Evacuated for a Recent Hurricane Had Not Evacuated for a Recent Hurricane Had Not Evacuated for a Recent Hurricane Had Not Evacuated for a Recent Hurricane
yes yes yes-sure yes-sure yes yes yes-sure yes-sure
Coeff. t-ratio Coeff. t-ratio Coeff. t-ratio Coeff. t-ratio
Constant 0.84 0.56 2.16 1.23 1.46 0.86 1.66 0.82
ln Price -0.50 -1.69 -0.86 -2.40 -0.99 -2.92 -1.20 -2.84
Probability 1.24 1.22 -0.91 -0.70 5.93 1.71 5.29 1.39
Cost 0.001 3.30 0.001 3.26 0.003 2.81 0.002 1.78
Income -0.002 -0.36 -0.001 -0.17 0.005 0.93 0.011 1.68
?2 18.47 18.47 18.07 18.07 22.20 22.20 15.94 15.94
R2 0.10 0.10 0.11 0.11 0.11 0.11 0.12 0.12
Cases 191 191 191 191 193 193 193 193
WTP 15.94 0.82 14.83 1.18 34.41 2.31 20.14 1.72
12
Summary
  • A majority of respondents would not purchase the
    product at even the lowest price
  • Respondents are rational, ahem, in response to
    price, risk, cost and expected costs
  • Respondents are risk neutral

13
Problems
  • Moral hazard ?p/?x gt 0
  • Strike Probabilities ? gt y/t
  • Subjective ? gt objective ?
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