The Impact of Loss Dimensions in Laboratory Insurance Markets

This paper examines the impact of severity and the probabilities of losses on the behavior of decision makers in an experimental market for insurance. Two subjects were paired, with one subject acting as the insurer and the second as the insured. Eighty-one pairs of subjects were presented with four loss distributions. Their task was to determine a mutually agreeable price for zero deductible, 1 00 percent coverage for each loss situation. The four loss situations differed with respect to the exact distributions of severity and probability. However, the distributions were perceived by the subjects as equivalent in terms of the expected value and variance of the loss. The results show the probability dimension was a significant factor in the premium. Neither severity nor the reference point of the decision makers was significant. It appears gender differences may play a role but the data was not such that anything more than casual observations can be made.