Framing of risk and preferences for annual and multi-year flood insurance

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Abstract

The decision of many individuals in floodplains to not purchase flood insurance may impair the risk-spreading function of flood insurance markets. This study estimates the effectiveness of risk communication frames and insurance policy conditions in increasing demand for flood insurance. It is examined how communication interacts with individual frames about the flood hazard that are rooted in regulatory focus theory. A choice experiment elicits willingness-to-pay (WTP) for annual and multi-year flood insurance, using of a survey of a representative sample of 1250 households. The statistical method is a mixed logit model that accounts for heteroskedasticity arising from stated choice certainty. The communication frames considerably increase WTP compared with a control group. This effect of communication is positively related to an individual's degree of prevention motivation. Moreover, we find that demand for flood insurance can be increased by introducing multi-year policies, as long as the contract duration is not too long. © 2013 Elsevier B.V.
Original languageEnglish
Pages (from-to)357-375
JournalJournal of Economic Psychology
Volume39
DOIs
Publication statusPublished - 2013

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