Demand for Multi-Year Catastrophe Insurance Contracts : Experimental Evidence for Mitigating the Insurance Gap

People fail to insure against disasters, even when insurance is subsidized, and insured properties are often covered inadequately. We examine insurance decisions in an experiment using multi-year insurance contracts to reduce such insurance gaps and contribute to our understanding of insurance choices as follows: First, many people prefer multi-year insurance. Offering this type of insurance may thus increase insurance penetration. Second, underinsurance can result from the reluctance to update the insurance coverage if there are costs involved with this updating. Multi-year insurance contracts that automatically consider price changes over time can reduce the insurance gap. Third, our results confirm previous results showing that subsidies are ineffective in increasing insurance penetration. Lastly, two side-findings: First, once people have made a decision, they tend to repeat it, demonstrating a strong consistency in decisions. Second, insurance demand declines after the occurrence of a disaster in our experiment