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Are Multiyear Policies the Answer For Flood? Behavioral Economics Meets Insurance

Economics, Finance, Psychology, money, probability, risk

Buyers and sellers of flood insurance can benefit from a longer-term perspective, and long-term multiyear policies may be the key to reforming the current system, a Wharton School professor said last week.

Speaking at the SAP Financial Services conference in New York, Howard Kunreuther, Professor of Decision Science and Business and Public Policy at the Wharton School of the University of Pennsylvania, drew on the principles of behavioral economics as he proposed ways to improve insurance market dynamics for the coverage of low probability/high consequence (LP-HC) events.

According to Kunreuther, telling someone there is a 1-in-100 chance that the event is going to occur next year isn’t likely to prompt any action to buy insurance or protect property. “It’s not going to happen. I’m not going to worry about it,” the person will say, the professor said, giving an example of a “threshold model” of behavior.

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