A series of laboratory studies of insurance decision making shows that people buy more insurance against events having a moderately high probability of inflicting a relatively small loss than against low-probability, high-loss events. Two explanations are discussed, both contrary to traditional utility theory. One postulates a utility function convex over losses. The second asserts that people refuse to protect themselves against losses whose probability is below some threshold. This research provides insight into other, often puzzling, facts about people's insurance behavior. Relevance for public policy is discussed. What determines whether people will act to protect themselves from the severe consequences arising from a low probability event? The answer to this question is vital for understanding how people cope with the risks from accidents, diseases, and natural hazards and for helping them to manage their lives more effectively in the face of such risks. The importance of this question has motivated a major research project concerned with one class of risks, those from natural hazards (floods and earthquakes), and one class of protective mechanisms, insurance.' The project staff, under the direction of Howard Kunreuther, interviewed 2,000 homeowners residing in flood-prone areas, half of whom were insured and half uninsured. In addition, 1,000 homeowners residing in earthquakePaul Slovic, Ph.D., Baruch Fischhoff, Ph.D., and Sarah Lichtenstein, Ph.D., are Research Associates; Bernard G. Corrigan, M.A., is Research Programmer/Analyst; and Barbara J. Combs, M.A., is Research Assistant, all with Decision Research in Eugene, Oregon. Slovic, Fischhoff, and Lichtenstein have worked together for a number of years on psychological studies of judgment, risk taking, and decision processes. They have recently reviewed this field for the Annual Review of Psychology. Slovic and Fischhoff are consultants to the National Research Council's Committee on SocioEconomic Effects of Earthquake Predictions. Slovic is a member of the socio-political resource group of the National Academy of Sciences Study of Nuclear and Alternative Energy Systems and is Adjunct Professor, Department of Psychology, University of Oregon. 1 This research was supported by NSF-RANN Grant ATA 73-03064-A03 to the Wharton School of the University of Pennsylvania under subcontract to the Oregon Research Institute. We thank Howard Kunreuther, Daniel Kahneman, and Amos Tversky for their invaluable contributions to this project. Frank Conklin supplied us with a prototype for the farm game. Comments and reprint requests may be addressed to the authors at Decision Research, 1201 Oak Street, Eugene, Oregon 97401.

Preference for Insuring Against Probable Small Losses: Insurance Implications

We offer a structured literature survey of experimental studies involving insurance demand choices and their experimental methodology. With this, we aim to fulfill two goals. First, we want to give an overview of the status of the literature as is. Second, the overview of the methodology provides researchers with an idea of how insurance demand experiments can be designed and what the advantages and disadvantages of the different design aspects are. We thus offer a resource for the design of future experiments.

Hypothetical Surveys and Experimental Studies of Insurance Demand: A Review

The options's package view of the whole life insurance policy suggests that a whole life policy is a package of options, each of which has value and is expected to influence the price of the policy. This viewpoint implies the general hypothesis that price differences between whole life policies can be explained by differences in policy contract provisions and differences in selected company characteristics. The option's package theory was empirically investigated using regression analysis on data from a sample of policies marketed in North Carolina. The results suggest support for the options package theory.

The Whole Life Insurance Policy as an Options Package: An Empirical Investigation

A graphical display in an insurance processing system is disclosed. The graphical display may include a representation of a human body. The representation of the human body may provide information to a user that is helpful in specifying insurance claim information. For example, the representation may provide information regarding body parts, information regarding injury codes, information regarding common injuries, information regarding common treatments and/or information regarding treatment codes. The representation may also be used to provide input into the insurance processing system.

Graphical input display in an insurance processing system

A dominant issue in the health reform debate is whether insurance coverage should be voluntary or mandatory. Clearly, the factors that determine who will seek voluntary coverage are relevant to this policy issue. This article uses experience from Washington State's Basic Health Plan to examine the enrollment choices of low-income families in a state-subsidized voluntary insurance plan offered through managed care organizations. We hypothesize that the decision to enroll, which encompasses the decisions to purchase insurance coverage and to select a particular plan, is influenced by four factors: the family's financial vulnerability, their risk perception, the price of coverage, and the transition costs of enrolling. Our enrollment model is supported by the data and has important implications for the design of voluntary programs. Families who choose to enroll are more likely to have a female head of household, young children, and a family member who has a part-time job and some college education. Higher premiums and availability of other insurance coverage decrease the probability of enrolling.

Voluntary public health insurance for low-income families: the decision to enroll.

The decision process involved in the selection of an optimum automobile collision insurance deductible provides an excellent opportunity to utilize the von NeumannMorgenstem utility development. In an extension of the theoretical formulations presented previously for this decision, a model was developed which was based upon a minimization of expected dis-utility. An intelview technique was used to develop dollar-dis-utility coordinates for each of ten subjects. A least squares program was invoked to fit a function to these data. These functions were then used in the model, along with both subjective and objective probabilities of loss plus premiums applicable to the individual, to arrive at an optimum deductible. Results of checking the model for reliability and validity are reported along with a comparison of actual with predicted deductibles. The model, as anticipated, was not descriptive. It is contended, however, that in a "qualified normative" sense it is a valuable decision tool. The selection of an optimum automobile collision insurance deductible by an individual is a decision exceptionally well suited to the application of a decision model incorporating von Neumann-Morgenstem utility. Previous efforts in this direction have been limited to a theoretical formulation. Herein is reported the results of a study designed to develop and utilize a model in an actual decision

A Deductible Selection Model. Development and Application

In order to investigate the usefulness of the von Neumann-Morgenstern utility concept in an actual decision making context, 30 subjects were interviewed. Their responses to questions were used to acquire a utility function which was then incorporated in a deductible selection model. The utility function was found to have little external validity either when used to predict choices between two lotteries or in hypothetical insurance consumption decisions. Used in this model it did, however, appear to be slightly more useful in describing actual deductible selections when compared with an expected monetary value model. An effort was made to determine the influence of personal variables on the deductible selection decisions. Using chi-square tests it was determined that the level of deductible is related to the individual's subjective probability-of-loss estimate and his income tax bracket. Utilization of the variables in stepwise regression and discriminant analyses yielded insignificant results for all variables. The question of whether utility functions are amenable to use in actual decision-making contexts has been the subject of considerable debate. Reflecting those who disparage its value, Houston states:1 Modem decision theory represents an important breakthrough or contradiction of the traditional interpretation of utility. However, it is only fair to note that many regard the theory as non-operational in all but the most trivial cases. Representing a more optimistic viewpoint are Friedman and Savage who note:2 Michael L. Murray, D.B.A., is Assistant Professor in the College of Business Administration of The University of Iowa. This paper, funded by a research grant from A.R.I.A., was presented at the 1971 Annual Meeting of A.R.I.A. 1 Houston, David B., "Risk, Insurance and Sampling," Journal of Risk and Insurance, December, 1964, pp. 522. 2 Friedman, M. and L. J. Savage, "The Utility Analysis of Choices Involving Risk," The Journal of Political Economy, August 1948, reprinted in Whether a numerical utility function will in fact serve to rationalize any particular class of reactions to risk is an empirical question to be tested; there is no obvious contradiction as was once thought to exist. This paper reports the result of a continuing effort to determine empirically the usefulness of utility3 functions in an actual decision context. The decision which is being analyzed is the selection of an automobile collision insurance deductible. This decision is viewed in both a descriptive and a normative manner. In the descriptive vein, a number of personal variables of the respondents to the study are analyzed for their ability to predict the Hammond, J. D. (ed.), Essays in the Theory of Risk and Insurance, Scott, Foresman and Co., Glenview, Illinois, 1968, pp. 97. 3The utility concept which is used in this paper and which is referred to in the two previous quotations is that which is referred to as "4von Neumann-Morgenstern utility" as developed in their landmark work: von Neumann, John and Morgenstem, Oskar, The Theory of Games and Economic Behavior, Princeton University Press, Princeton, 1944, pp. 1-31.

Empirical Utility Functions and Insurance Consumption Decisions

Using the basic assumption that a cash value life insurance policy can be equated with a program combining term insurance and a separate investment fund, a methodology is provided for analyzing the investment performance of cash value contracts. The suggested model involves the comparisons of savings "accumulations" in the two programs. A computer program has been written which allows the user to select values for a number of relevant variables, including years of analysis, age, return expected on outside investment, and tax bracket. It is suggested that the model and program would be useful in classroom settings as well as for advising consumers. In any course on life insurance, one must come to grips with the question of the relative merits of cash value and term policies. There are a number of routes which can be taken in this area. Some teachers may choose to recommend one or the other of these products on a blanket basis. Others may state that it depends upon the individual situation and that no general guidelines can be given. A position taken by many is that one should buy cash value insurance unless a strong case can be made for the purchase of term insurance in a particular instance. It is this writer's observation that this is the philosophy followed by the majority of people working in the insurance industry. The material in this article is based upon the contrary position that one should buy term insurance unless a good case can be made for the purchase of cash value insurance. The purpose of this article is not to delineate the reasons for that position. Suffice to say at this point that this opinion is based upon the conclusion that the basic purpose of life insurance is to provide protection against premature death and that term insurance provides this protection during the period when it is needed. Having accepted the above premise, it remains for the instructor to deal with the question "When should cash value insurance be purchased?" One of a number of instances where it should be used is when the buyer wishes to combine a savings program with his life insurance program. In deciding whether he wishes to do so (given that he wishes a savings program of some type) the buyer ought certainly to be interested in the Michael L. Murray, Ph.D., is an Associate Professor in the University of Iowa. This paper was submitted in April, 1974.

Analyzing the Investment Value of Cash Value Life Insurance

This paper investigates the relationship between bodily injury claim payments and the limits of liability insurance carried by the insured. This relationship determines whether claims on policies with various limits can be aggregated to price increase limits. The authors found that the claims do vary by limit (even when the censoring effect of the limit itself is removed) but the variation is not great. An interesting discovery was that increases in the economic loss accounted for the greatest portion of the increases in claim payments as limits increased. As expected, relatively more suits involved policies with higher limits and these suits yielded higher judgments.

Bodily Injury Claim Payments as a Function of Automobile Liability Insurance Limits

Self-Insurance of State-Owned Property

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