Title: Willingness to Pay for Low Probability, Low Loss Hazard Insurance
1Willingness 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.
2Evacuation 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.
3Literature
- McClelland, Schulze and Coursey (1993)
- Ganderton et al. (2000)
- Ozdemir (2005)
- Burrus, Dumas and Graham (2005)
4Data
- 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)
6Empirical Model
7Dependent 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.
8Willingness 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
10Independent Variables
- Policy price p
- Evacuation probability r S (? p )
- Evacuation cost c
- Factors affecting evacuation
11Willingness 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
12Summary
- 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
13Problems
- Moral hazard ?p/?x gt 0
- Strike Probabilities ? gt y/t
- Subjective ? gt objective ?