Is Default Risk Acceptable When Purchasing Insurance? Experimental Evidence for Different Probability Representations, Reasons for Default, and Framings

We experimentally analyze consoumers' reaction to insurance default risk. Consistent with eralier studies, we find that insurance with default risk is extremely unattractive to most individuals. A considerable fraction of consumers completely refuse to accept any default risk; others ask for large reductions in insurance premiums. These findings are robust against several variations of the setup: probability representations (verbal and numeric), reasons for feault (insolvency and claim settlement practices), framing (positively and negatively expressed probability of default), and comparison between the policy's level of default and that of an alternative (deafult free and small default risk). The major driver of willingness to pay is level of security concern and decsions are sensitive to the dafault probability. All other effects on willingness to pay are unsystematic.