Risk communication nudges and flood insurance demand

Abstract

Losses caused by natural disasters have been increasing worldwide, and climate change is projected to continue this trend in the future. Insurance can be used by individuals to protect against the risk of natural disaster loss. However, individuals often purchase insufficient amounts of insurance against disaster risks, which may be due to them neglecting the likelihood of these risks which are perceived as falling below some threshold level of concern. Using choice architecture, such as alternative forms of risk communication, can nudge individuals to pay attention to natural disasters and increase insurance demand by raising perceived risk and facilitating the comprehension of low probabilities. In an online experiment, we tested whether reframing a low flood probability in terms of the cumulative likelihood across time, as well as whether visualizations of risk on ladders and grids may be effective in raising flood insurance demand. Our primary finding is that reframing of probabilities, especially in combination with the visual aids, generally raises (lowers) demand for flood insurance among younger (older) homeowners and those who are more (less) concerned about the consequences of climate change. Whereas, on average we find no significant impact on flood insurance demand of any of the risk communication tools tested either in isolation or combination. Based on these findings, we draw several lessons for risk communication.