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Do people have a bias for low deductible insurance?

Journal of Risk and Uncertainty volume 64, pages 1–17 (2022)Cite this article

Abstract

This paper reports on a controlled web-based experiment designed to determine whether subjects have a predisposition toward low deductible (LD) rather than high deductible (HD) insurance plans when the LD plan is the default. We also are interested in whether individuals’ choice between LD and HD plans remains consistent if the default and premiums are changed. We find that only slightly more than half of the respondents choose a low deductible when the default option is the LD plan, and that many subjects consistently preferred the HD plan. In other words, we found no general preference for low deductible insurance. The research presented here should be viewed as another step in highlighting the importance of understanding individuals’ decision processes associated with the purchase of insurance.

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Acknowledgements

We thank Spencer DeRoos for assistance in analyzing the data, a referee and Carol Heller for helpful suggestions on an earlier draft of the paper.

Funding

Support for this research comes from a grant from the Alfred P. Sloan Foundation (G-2018- grant f11100/SUB18-04), the Travelers–Wharton Partnership for Risk Management, National Science Foundation (NSF) grant (EAR-1520683) through Princeton University, the Wharton Risk Management and Decision Processes Center, and the Wharton Behavioral Lab at the University of Pennsylvania.

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Authors and Affiliations

  1. Risk Management and Decision Processes Center, The Wharton School, University of Pennsylvania, 3819 Chestnut Street, Suite 217, Philadelphia, PA, 19104-6366, USA

    Howard Kunreuther

  2. Health Care Management Department, The Wharton School, University of Pennsylvania, 208 Colonial Penn Center, 3641 Locust Walk, Philadelphia, PA, 19104-6218, USA

    Mark Pauly

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  1. Howard Kunreuther
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Correspondence to Howard Kunreuther.

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Appendix

Appendix

Explanatory variables

Variable Setting Coding
RISKY
(categorical) 		How do you see yourself: are you generally a person who likes to take risks or do you try to avoid taking risks? 1 = “Not at all willing to take risks”
2
3
4
5 = “Very willing to take risks”
RISKY_binary How do you see yourself: are you generally a person who likes to take risks or do you try to avoid taking risks? 1 = scores for RISKY = 4,5
0 = scores for RISKY = 1,2,3
PEACE
(categorical) 		Another person purchases insurance because it gives them peace of mind in addition to providing financial protection against risk. Please indicate whether such a person is very much like you, like you, somewhat like you, not like you, or not at all like you 1 = “Not at all alike you”
2
3
4
5 = “Very much like you”
PEACE_binary Another person purchases insurance because it gives them peace of mind in addition to providing financial protection against risk. Please indicate whether such a person is very much like you, like you, somewhat like you, not like you, or not at all like you 1 = scores for PEACE = 3,4,5
0 = scores for PEACE = 1,2
Age What is your age?  
Gender (binary) What is your gender? 1 = male
0 = female
EDUCATION What is the highest level of education you have completed? Less than high school
High school/GED
Some college
2 year college degree
4 year college degree
Masters degree
Doctoral degree
Professional Degree
EDU
(binary) 		What is the highest level of education you have completed? 1 = 4 year college degree, Masters degree, Doctoral degree, Professional degree
0 = 2 year college degree, some college, high school/GED, less than high school
INCOME What is your combined annual household income? Under $30,000
30,000 – 49,999
50,000 – 69,999
70,000–89,999
90,000 – 109,999
110,000–129,999
130,000 – 149,999
150,000 + 
INCOME
(binary) 		What is your combined annual household income? 1 = 90,000 + 
0 = Under $90,000
ILLNESS
(binary) 		Did you have a serious illness during the last five years? 1 = Yes
0 = No

Logit regression results using an expanded set of subject level explanatory variables

Four round 1 scenarios

Variable name, log odds, and significance level (p-value).

Default – Low Deductible (LD), favorable premium

Variable Log Odds (significance level)
RISKY_binary 1.465 (0.233)
PEACE-binary 0.788 (0.632)
AGE 0.990 (0.484)
GENDER 1.142 (0.676)
EDU_binary 1.528 (0.194)
INCOME_binary 0.903 (0.799)
Did you have a serious illness during the last five years? 1.796 (0.183)
Constant 0.889 (0.877)

Default – Low Deductible (LD), unfavorable premium

Variable Log-Odds (significance level)
RISKY_binary 1.775 (0.059)
PEACE-binary 0.447 (0.099)
AGE 0.980 (0.111)
GENDER 1.191 (0.559)
EDU_binary 1.311 (0.370)
INCOME_binary 0.390 (0.012)
Did you have a serious illness during the last five years? 1.127 (0.782)
Constant 3.309 (0.108)

Default – High Deductible (HD), favorable premium

Variable Log Odds (significance level)
RISKY_binary 0.668 (0.214)
PEACE-binary 3.264 (0.144)
AGE 0.973 (0.093)
GENDER 1.454 (0.244)
EDU_binary 0.833 (0.588)
INCOME_binary 0.586 (0.168)
Did you have a serious illness during the last five years? 2.585 (0.044)
Constant 0.699 (742)

Default – High Deductible (HD), unfavorable premium

Variable Log Odds (significance level)
RISKY_binary 0.660 (0.161)
PEACE-binary 1.168 (0.846)
AGE 0.975 (0.047)
GENDER 1.633 (0.094)
EDU_binary 1.258 (0.429)
INCOME_binary 0.745 (0.432)
Did you have a serious illness during the last five years? 2.456 (0.021)
Constant 1.114 (0.908)

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Kunreuther, H., Pauly, M. Do people have a bias for low deductible insurance?. J Risk Uncertain 64, 1–17 (2022). https://doi.org/10.1007/s11166-022-09368-x

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  • DOI: https://doi.org/10.1007/s11166-022-09368-x

Keywords

  • Behavioral economics
  • Health insurance
  • Deductibles
  • Default choices

JEL Classification

  • C91
  • D12
  • D81
  • G22
  • I11