More People Will Buy Insurance If You Reframe the Odds

When Hurricane Harvey ravaged Texas and Louisiana in summer 2017, just 17 percent of residents most affected by the storm had flood insurance. This choice might have felt reasonable to longtime residents, as the annual probability of flood had seemed small (less than 1 percent). But residents’ choice not to pay modest annual premiums ultimately cost $1.2 billion in federal disaster assistance.

To head off more such outcomes, three researchers—Chicago Booth’s Shereen Chaudhry, the US Forest Service’s Michael Hand, and University of Pennsylvania’s Howard Kunreuther—explored how policy makers can convey to consumers, in more compelling fashion, the true risk of large-yet-uncommon events.

One method the researchers examined involves reframing cumulative threats over longer time spans, a technique called broad bracketing. Say there’s a 1 percent chance of flood in any given year. Those odds, while unalarming on an annual basis, translate to an arresting 26 percent chance of at least one flood over 30 years, the life of a typical mortgage.

To test the effects of broad bracketing on decision-making, the researchers constructed six experiments, each with 1,200 to 2,900 participants. In all the experiments, participants were given the choice between paying a small fee (an insurance premium) or risking a much larger loss, albeit with the low probability of 1 percent.

When participants saw the cumulative probability they would experience a flood at some point over time, rather than the probability that they would experience one in the shorter term, more of them sought insurance, the researchers observe. This was true when the flood-risk bracket was broadened to 200 years (87 percent risk) or even just 10 years (10 percent risk). These numbers packed more visceral punch than the 1 percent annual risk originally presented.