Climate Change Catastrophes and the Effect of Ambiguity

Abstract

There has been very little research to test whether ambiguity affects individuals' decisions to insure themselves against the catastrophic effects of climate change. This paper attempts to study how individuals respond to the availability of an insurance that would give them immunity to a climate change catastrophe. Moreover, if such an insurance is available to them, do they insure themselves sufficiently? Further, we investigate the policy implications for insurance companies: does increased availability of information regarding the probability of the catastrophic event, lead to an increase in insurance subscriptions? Finally, we also investigate policy implications for the State - Can State intervention help in ensuring that individuals have better insurance cover for climate change catastrophes? We find that a majority of subjects do insure themselves sufficiently, if given the opportunity. Removing strategic uncertainty and increased information, leads to a significant increase in insurance subscriptions. Interestingly, we find that State intervention or a nudge can backfire and have unintended, adverse consequences.