Abstract: Recent changes in the commercial property-liability insurance business have made it unlikely that large claims will be paid promptly and willingly. The situation is not limited to asbestos, pollution, and medical product liability, though certainly evident there. The authors examine the situation from three economic and psychological perspectives—option theory, asymmetric information theory, and prospect theory. All three indicate that if insurance were seen by customers as less than fully certain and reliable, the resulting discounting of its value—and hence buyers' willingness to pay for it—would be much deeper than one would expect. Although competitive and legal steps could be taken to head off such a disaster, none of them is likely.

Abstract: In Schmidt (1998) a new axiomatic model of decision making under risk has been developed, which can accommodate the certainty effect and is, apart from this property, equivalent to expected utility in all other choice problems. A central feature of this model, termed expected utility with certainty preference, is to allow for a measurement of the certainty effect analogously to the measurement of risk aversion by the Arrow-Pratt measure. The purpose of the present paper is to provide a complete characterization of certainty preference. Therefore, among other things, all standard concepts in the theory of risk aversion are defined and analyzed in the framework of certainty preference. This investigation reveals that the measurement of the certainty effect has the same theoretical capabilities as the measurement of risk aversion by the Arrow-Pratt measure. Additionally, expected utility with certainty preference is compared with the existing literature on non-expected utility models. Key words: Certainty effect - risk aversion - Arrow-Pratt measure Non-expected utility theory