Consumers Buy Too Much Insurance According to New Study from NYU Stern

Business Wire,  May 21, 2008  

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NEW YORK -- In this recessionary climate, consumers are rethinking their expenses and risk as health, mortgage and personal assets insurance issues loom large. New findings suggest that consumers are paying more than they should for insurance coverage.

In his new co-authored research paper entitled, "Why Do People Buy Too Much Insurance?," NYU Stern Professor Zur Shapira, an expert in managerial risk taking and organizational decision-making, with co-author Professor Itzhak Venezia, finds that 19 to 25 percent of insurance customers overpay for insurance by purchasing policies with low or zero deductibles.

The study found:

* Consumers overestimate the benefits of full-coverage policies that cover every damage, even if it is very small or the chance of it occurring is highly improbable, which leads them to purchase unnecessary, expensive policies

* In most cases, consumers should purchase policies with deductibles, which would save them money while providing ample coverage

* Consumers are more prone than insurance professionals to underestimate policies with deductibles

The authors conducted three experiments in which separate groups of subjects - consumers and insurance professionals - were asked to play the role of insurance sellers and to price policies with and without a deductible. The prices the subjects set were then compared to the true expected damages under each policy. The results showed that 47 to 56 percent of consumers exaggerated the expected damages and deductible payments of policies with non-zero deductibles, while only 27 percent of insurance professionals did so.

The full paper is forthcoming in the Journal of Economic Psychology and is available at:

doi:10.1016/j.joep.2007.07.007.

To speak with Professor Shapira, contact him directly at 212-998-0225, zshapira@stern.nyu.edu, or contact Jenny Owen in NYU Stern's Office of Public Affairs at 212-998-0561, jenny.owen@stern.nyu.edu.

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