Individual determinants of self protection among homeowners with(out) disaster risk insurance

We will examine the effects of a premium discount and different types of insurance (mandatory, voluntary, no insurance) on damage reducing investments in an online experiment.

2018-05-13

2018-06-10

damage reducing investments

willingness to pay for flood insurance

We use a short version of the investment game which was programmed for an earlier experiment. This investment game is followed by a final survey to gather data on risk preferences, time preferences and other behavioral factors that could be important characteristics related to flood risk.

In the investment game, respondents are asked to imagine owning a house in a floodplain for the next 25 years and a savings balance of 65,000 ECU. All payments in the game are subtracted from this balance. A scenario starts with instructions and the introduction of the parameters: yearly flood probability (1%), maximum damage (50,000 ECU), savings balance (65,000 ECU) and insurance (No/Yes, with 5% deductible). The yearly objective probability of flooding is given at 1%. The sequence of pages in a scenario is Invest, Pay premium, Flood risk result, Overview of results. The scenario concerns 25 years, but decisions are made only once to facilitate a short version of the investment game. The instructions are supported by graphics and are always available as a pop-up screen throughout the experiment. All respondents are shown the Invest page with five discrete investment levels and accompanying benefits.

The Pay premium page is shown to individuals in the Insurance treatments: here the fair premium was paid from their savings balance for all 25 years at once. The Flood risk result page shows a grid with 100 houses, where the house of the participant isindicated with a square and all houses flooded (according to the yearly 1% flood probability) at least once in the 25 years of the scenario are blue. In case a participant's house is one of these, the deductible (or damage in the No Insurance treatment) is paid from the savings balance. The Overview of results page shows the history of the savings balance (65,000 ECU - premiums - deductible/damage - investment).

The investment game starts with a test scenario to make participants familiar with the decision screens. To ensure understanding of the game and the savings balance, the test scenario is followed by comprehension questions, conditional on treatment. The answers are available in the pop-up instructions. After answering all comprehension questions correctly, subjects can start with the main scenario.

Respondents in the Voluntary treatment will be moved to Insurance and No Insurance based on their WTP. If our parameters are such that a large majority self selects into either of those, we will assign more respondents to the Voluntary treatment (or change the parameters slightly) to ensure enough observations (at least 300) in both.

randomization done by oTree software

individual

No

5 treatments

The sample targets 2000 homeowners who are located in the river delta areas of the Netherlands with flood probability standard of 1 in 1250.

At least 300 homeowners per treatment. Exact sample size per treatment will be determined after a pilot with 100 observations in the Voluntary treatment.

A sample size analysis assuming an alpha of 0.05 and a power of 80% indicated that we need a sample size of at least 252 participants per treatment in order to detect the smallest effect size* found in the scenario of a previous lab experiment, closest to our current parameters, with a Wilcoxon Mann Whitney test. * Mean investments in ECU in previous experiment No Insurance versus Mandatory Insurance: 2711.9 (sd 4102.4) versus 1793.4 (sd 3976.8): effect size 27%