Risk Attitudes to Catastrophic Events: VSL and WTP for Insurance Against Earthquakes

Abstract

The purpose of the paper is to investigate the attitude to risk related to low-probability, high-impact events. To do this, we compare the willingness to pay (WTP) to reduce mortality risks and the WTP for life insurance against earthquakes. We explore whether risk perception affects these measures, and exploit WTP to reduce risk of fatality to calculate the Value of a Statistical Life (VSL) related to seismic events. We rely on data from a survey administered to a representative sample of the Italian population. Our results highlight that the WTP to reduce mortality risk is lower than the WTP for life insurance, and that the correlations between risk perception and these two measures differ. The findings suggest that individuals’ preferences are directed toward risk management strategies in which the mortality risk is transferred to the capital market, rather than risk mitigation strategies involving the individual in sharing the costs and benefits with all of society.