Default options and insurance demand

Default options may provide a low-cost way of influencing behaviour without modifying incentives and constraining choices between alternatives. However, an improved understanding is needed on whether they are effective when individuals have experience with making the choice in practice and have preferences for specific alternatives. We study whether defaults can be used to increase insurance coverage against low-probability/high-impact risks, like floods, and whether past flood insurance purchases and flooding experience moderate the effect of defaults. Our study uses a naturally occurring difference in experience, comparing the surveyed flood insurance choices of 1,187 homeowners, half of whom are in the Netherlands, where flood insurance penetration rates are low and recent flooding caused minor losses, and the other half of whom are in the United Kingdom (UK), where the opposite is true. We find defaults are effective amongst homeowners with little to no flood-related experience: in the Netherlands defaults increase the likelihood of insuring by between 17 and 18 percentage points. Although there is no overall effect of defaults in the UK, defaults increase flood insurance coverage for risk averse individuals, and those who have no reported previous flood experience and have not purchased flood insurance. Anticipated regret about not having insurance coverage in the event of a flood, and perceptions about the insurance cost explain between 34 and 37 percent of the relationship between the default and flood insurance demand. We discuss policy implications of our findings. (C) 2020 The Authors. Published by Elsevier B.V.

Automated summary

The study shows that defaults can effectively increase the likelihood of purchasing flood insurance for homeowners with little to no flood-related experience. Defaults also increase flood insurance coverage for risk-averse individuals and those without previous flood experience or insurance purchase. Anticipated regret about not having insurance coverage in the event of a flood, and perceptions about the insurance cost, play a significant role in explaining the relationship between defaults and flood insurance demand.