Help! Risk questions!?

Question

what economic factors might be associated with a reluctance to purchase insurance against natural disasters and other rare events?

and why should a risk averse individual spend more to insure against a high value/low probabiliy loss than against a low value/high probabiliy loss of the same expected value? how can i capture this in a diagram??

Thanks alot!!!

Answer 1

well the main economic factor is "why should io spend £300 on insureance for something that might not happen when little jophnny needs new shoes"

invariably, people have "more important" which really means more pressing things to spend their money on.

chance of floodd -5%
chance of johnny dying from pneumonia cos his shoes leak and its winter - 50%

simple risk ananylsis really

Answer 2

In case of natural disasters you do not bare the entire burden of loss, governments give aid, banks hold mortgages which home owners can default on in case of large loss. Also insurance companies may go bankrupt, if for example there is a comet impact. An interesting question is why banks do not insist on earthquake insurance in California when giving a mortgage.Did banks in LA demand flood insurance? It is not just individuals that gamble with other peoples money.

The essence of risk aversion is to avoid losing everything, because if you do you are out of the game. A diagram should be that utility decreases more rapidly for larger losses expressed in percent of wealth lost