INSURER AMBIGUITY AND MARKET FAILURE

A series of studies investigate the decision processes of actuaries, u nderwriters, and reinsurers in setting premiums for ambiguous and unce rtain risks. Survey data on prices reveal that all three types of thes e insurance decision makers are risk averse and ambiguity averse. In a ddition, groups appear to be influenced in their premium-setting decis ions by specific reference points such as expected loss and the concer n with insolvency. This behavior is consistent with a growing analytic al and empirical literature in economics and decision processes that i nvestigates the role that uncertainty plays on managerial choices. Imp roved risk-assessment procedures and government involvement in providi ng protection against catastrophic losses may induce insurers to reduc e premiums and broaden available coverage.