Study of insurance demand finds errant behavior after disasters

Disaster survivors end up under- or over-insured based on skewed perceptions of risk.

Merritt Melancon | Aug. 03, 2020

Sattelite image of Hurricane Dorian
Satellite image of Hurricane Dorian

“Lightning never strikes the same place twice.”

It’s a comforting thought for someone who just lost everything in a once-in-a-lifetime disaster. But it’s not the kind of advice that should be applied to property insurance decisions.

The mentality behind the old saying affects how people insure their homes and businesses against a natural disaster, according to the University of Georgia’s David Eckles.

When people experience a terrible catastrophe, they initially increase the insurance coverage on their home or business, said Eckles, a risk management and insurance professor at the Terry College of Business. But over time they will begin to underestimate their risk and reduce their coverage as the disaster fades from memory.

Neither the initial over-insurance or the subsequent under-insurance reflects the correct risk appraisal of the situation, Eckles said, but the second scenario can put people’s financial stability at greater peril. 

“If they don’t have a loss, they say, ‘Well, I’ve overestimated my probability of loss,’ and they’re more likely to buy less insurance,” Eckles said. “Then if they have another year of no losses, they say, ‘Oh, I guess my risk was even lower than I thought,’ and they’ll buy even less.”

Eckles’ study of insurance demand in Florida insurance markets and the gradual reduction in insurance take-up rates after the busy 2004-2005 hurricane season will be published this year in the Journal of Risk and Uncertainty.

Eckles and his co-authors — Charles Nyce at Florida State University and Jacqueline Volkman-Wise and Randy E. Dumm at Temple University — analyzed insurance policies supplied by the Florida Citizens Property Insurance Corp. between 2002 and 2008 to see how individual homeowners responded to years of violent hurricane activity followed by years of relative calm. They looked at policy data as a model for psychological and behavioral biases that impact insurance markets.

Citizens Property Insurance Corp. is a publicly backed insurer that offers insurance to high-risk properties — those most at risk to coastal hurricane or sinkhole damage in Florida. The researchers tracked about 1 million policies (including renewals and claims) for their study.

“We found that the larger a catastrophic loss, the lower the deductible purchased when the insurance was renewed,” Eckles said. “We equate that lower deductible with higher demand. We attribute that relationship between the increased loss in the previous year and higher demand for insurance in the current year to believing that another disaster is more likely to happen.

“The true probability is never affected by one storm, but people behave in a way that assesses risk based on their experience.”

The link between low losses and underestimation of risk works the same way. As the memory of a claim for damages became more distant, homeowners tended to purchase less insurance, Eckles said. This can be dangerous. 

“People need to understand that when there are no losses, that absence of loss is not representative of the true probability of their risk,” Eckles said. “Just because you go through 10 years of inactivity, doesn’t mean that you’re not going to have a loss in the 11th year.

“Education is important,” Eckles said. “Just because there haven’t been losses doesn’t mean there can’t be, and people should be prepared with the right insurance.”


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