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Consumer Risk Selection and Price Sensitivity: Evidence from a Renters Insurance Market

This paper tests for the existence of multiple dimensions of private information in a renters insurance market. We estimate two sets of results: 1, fully controlling for factors used in insurance pricing, do renters living in high-risk areas buy more earthquake insurance on both the extensive margin (whether coverage is purchased) and the intensive margin (coverage limit chosen); 2, exploiting the discontinuity in price across pricing territories, how do renters’ price sensitivities differ in different geographic areas. We follow health economics literature in inferring “taste for insurance” from consumer price sensitivity. We find evidence that renters living in higher-risk territories are more price sensitive than those living in lower-risk territories, resulting in the within-territory (price-fixed) selection to be less severe for those living in high-risk areas, as they are probably paying more attention to the absolute level of price than to the risk information, and do not take up earthquake insurance even though they know that they are getting a relatively good price on insurance.