Journal of Risk and Uncertainty

, Volume 15, Issue 1, pp 7–28

Probabilistic Insurance



Probabilistic insurance is an insurance policy involving a small probability that the consumer will not be reimbursed. Survey data suggest that people dislike probabilistic insurance and demand more than a 20% reduction in the premium to compensate for a 1% default risk. While these preferences are intuitively appealing they are difficult to reconcile with expected utility theory. Under highly plausible assumptions about the utility function, willingness to pay for probabilistic insurance should be very close to willingness to pay for standard insurance less the default risk. However, the reluctance to buy probabilistic insurance is predicted by the weighting function of prospect theory. This finding highlights the potential role of the weighting function to explain insurance.

probabilistic insurance decision weights prospect theory 


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Copyright information

© Kluwer Academic Publishers 1997

Authors and Affiliations

    • 1
    • 2
    • 3
    • 4
    • 5
  1. 1.CentERTilburg UniversityTilburgThe Netherlands
  2. 2.Medical Decision Making UnitLeiden UniversityLeidenThe Netherlands
  3. 3.Graduate School of BusinessUniversity of ChicagoChicagoUSA
  4. 4.National Bureau of Economic ResearchCambridge
  5. 5.Stanford UniversityStanford

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