Estimating Risk Preferences from Deductible Choice

TLDR

We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. The model incorporates adverse selection by jointly modeling unobserved heterogeneity in claim rates and risk aversion. The analysis reveals substantial, skewed heterogeneity in risk attitudes, with women more risk‑averse, a U‑shaped age pattern, positive links to income and wealth, and greater variability in risk aversion than risk, underscoring important pricing implications. JEL codes: D81, G22.

Abstract

We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing. (JEL D81, G22)