Consumer’s Ambiguity


Which strategies do insurers follow to deal with consumer's ambiguity?  Do we reach an optimal insurance market?

  There have been many surveys in the past about consumer's and organizational ambiguity (Youjae Yi 1993; Hogarth R. and Kunreuther H., 1989, Kunreuther et al 1995 and others). Furthermore, experiments and surveys presented that ambiguity affect market prices (Budescu et al., 2002, Ho et al) and according to Yi (1993) if a product is obscure to consumers it is possible to discourage them from buying it. Life and health insurance contracts are a tangible example of this kind of products. Unfortunately, there is not enough literature explaining how can sellers cope with ambiguity and persuade potential buyers to purchase the correct amount of product in the optimal price.

  This survey will focus to the most common strategies, Greek insurance sellers; use to overcome the arguments of purchasers. The dissertation will begin with a literature background, of what generates ambiguity at individual need to be insured and in insurance contracts. I will also present the main policy strategies that insurers employ from insurance companies and bibliography.

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  After the literature review it will be the research in Greek insurance sellers and consumers which will help me to find out which are the most common and efficient strategies and if the Life and Health insurance market is optimal, or individual's ambiguity mislead the market from reaching the best possible point. 

  In order to do the field research I will use two types of questionnaires. One for sellers and one for potential buyers. Because the questionnaires are going to be really important in my research I will describe in detail, how I decided the questions included and the purpose of each one. Both of them will have questions where responders will answer in a point of scale, like Rizzo et al. (1970) and Lyons's (1971). The consumer questionnaire will be based to the seller's questionnaire. I will do that in order to investigate which of the preferable strategies for insurers are also preferable from consumers and if consumers would prefer more information to be disclosed to them. A question with high importance will be how the insurers inform their potential clients for the probability of a loss. They disclose just an average probability; a range of probabilities; they inform them about the probabilities under ambiguity or not?

  The sample will be comprised from a pooling of approximately 100 insurers and 100 hypothetical consumers, with a range of age, experience, education, marital and also geographical diversification, which influences the needs and insurance culture as I know from previous experience working in insurance companies. Consumers response will be evidence for which of the strategies are most effective and if they are convinced for what kind of contract they should buy. Including Greek Insurance Organization data will be helpful to investigate if the market is optimal.

  Help from three insurance companies will be sufficient to my research, as they will help me to distribute the questionnaire to sellers and receive reliable and honest responses. Furthermore, the companies will provide me data for the performance of each of the seller the last five years in order to evaluate them according to the strategies they use to deal with consumer's ambiguity. The human resources director of one of the companies will also help me to assure that insurers and consumers will be able to answer all questions.

  I believe that the field research will be finished at end of July. Afterwards, a statistical analysis of the data will measure the significant factors that help to overcome the failures caused from ambiguity. I am going to use the SPSS program to do the statistical analysis. The results from the statistical analysis will be provided to the reader in tables and figures.

 In conclusion I hope to have results to conceal the most sufficient strategies and the reasons make them sufficient. The imperfections of insurance market in Greece, the errors of insurers and insurance contracts will also be discussed in the last part of the dissertation. All the mistakes and difficulties I will face in that procedure will also be discussed in the last part of the paper. Ending, a proposal for an efficient policy of selling life-health insurance contracts under ambiguity will be presented, taking under consideration what kind of information and approach consumers prefer in order to feel more confidence, when buying an insurance contract.

Reference List

  1. Budescu, D., Kuhn, K., Kramer, K., and Johnson, T., 2002, ‘Modeling certainty equivalents for imprecise gambles', Organizational Behavior and Human Decision Processes, Vol 88.
  2. Ho, J., Keller, R., and Keltyka, P., 2002, ‘Effects of Outcome and Probabilistic Ambiguity on Managerial Choices', The Journal of Risk and Uncertainty, Vol 24(1).
  3. Hogarth, R.   and Kunreuther, H., 1989, ‘Risk, ambiguity and insurance', Journal of Risk and Uncertainty, Vol 2(5).
  4. Kunreuther, H., Meszaros, J., Hogarth, R., and Sprance, M., 1995, ‘Ambiguity and underwriter decision processes', Journal of Economics Behavior and Organization, Vol 26.
  5. Rizzo, J., House, R., and Lirtzman, S., 1970, ‘Role Conflict and Ambiguity in Complex Organizations', Administrative Science Quarterly, Vol 15(2).
  6. Yi, Youjae, 1993, ‘The Determinants of Consumer Satisfaction: The Moderating Role of Ambiguity', Advances in Consumer Research, Vol 20.



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   Most of people think that insurance is a new idea and industry which was introduced in our life during the colonization (Spirou, E., 2000). The truth is that insurance is really old and we have proofs of Life-Health insurance since the Greek and Roman Empire. Around 600 AD, the above civilizations structured unions named “benevolent societies”. The goal of those groups was to support families after husband death. During Middle Ages advanced, but still in a primary level, groups focused in similar methods of compensation ( 

  Thus, insurance as a concept is not new, evidence of it can be found in the early stages of humanity. Obviously the forms of insurance that we are familiar with today are different but are still something not new. Insurance industry has grown significantly since World War II by an annual rate of more than ten percent until 1950. In 1980s life insurance had a great success and the global life insurance business bloomed with a growth rate over 25 percent per year (Browne and Kihong, 1993).  An illustrated example for the first steps of life-health insurance and about the mistakes happened is Charles Povey act. In 1706 Charles Povey set up the Trader's Exchange in London where he convinced some people to subscribe with a very small fee into a life-health insurance fund. Each member was supposed to appoint any person to be life insured. In quarterly basis, a specified amount of money would be divided among the members that made a claim in the case that the insured person they had nominated was deceased. A year later Povey found himself in an unfortunate position where many claims had been made, so that the benefit payment per claimant was reduced to the point that the insurance fund was no longer attractive for new members. Eventually after a few years, Trader's Exchange was dissolved. The problem was that since members were able to nominate anyone for life insurance, they were choosing consciously unhealthy people with high mortality chances in order to collect the claims (Dickson, 1960).

  Although, life-health insurance play a very important role to the stability of economy and inside family, had many opponents during the long history of insurance industry.  Rotman-Zelizer (1983) present in her book a New York Times scripture from 1983 that presents how suspicious were the world for life insurance and misunderstood was the whole concept of insurance. “ He who insures his life or health must be victim of his own folly or other's knavery” (New York Times, 1983). All around world took many years to understand the importance of life insurance and still now many people consider that life insurance is something useless (Rotman-Zelizer, 1983) .

What are Life and Health Insurance and the Need for?

   Marshall (1920) and Fischer (1930) realized that individual's life expectancy is uncertain. Unfortunately, none of them mentioned what kind of reactions we should expect from a rational person in order to deal with the life expectancy risk. Most scholars of that period did not take under consideration in their researches the affection of life risk in consumer decision over life cycle. On the other hand, Yaari (1965) was the pioneer who went “to the other extreme, by concentrating entirely on the uncertainty of lifetime and ignoring the other uncertainties which a consumer must normally cope with. The uncertainty of future earnings, for instance, will enter the discussion only insofar as the flow of earnings stops when consumer dies” (Yaari, 1965, p. 137). Inspired by Yaari's work, many scholars begin to take under consideration risk of life and the contribution of insurance to minimize it.

  In order to comprehend the need of Life and Health insurance and why insurance is one of the biggest industries of the world I must first present some definitions of Insurance, Life Insurance and Health Insurance.  Insurance is a contract between an individual and an insurance company (insurer). The buyer usually is the insured but not always as the person who pays for the insurance contract may not be the insured. An insurance contract gives the right to the insured party when suffer a loss to be compensated from the insurer for the misfortune that occurred. The compensation comes from a fund where the premiums from all policyholders contribution. The insurance company over take the risks of the insured in exchange of a specific amount of money which is called premium (Harrigton and Niehaus,2003). Thus, we can say that insurance companies are professional risk takers. But we cannot assume that they are gamblers. Insurance companies gather information for the probabilities each type of risk and they calculate a premium. The premium for each loss must be ‘fair' in order to attract buyers but also sufficient to be able to compensate a portion of the pool which will have a claim and cover the costs of the company.     (, (

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  Thus, we can assume that an insurance contract is a transaction between two parties. A risk taker wish to pool many risk types under his umbrella administer the premiums from all the policyholders, invest them, compensate those who claim a loss and come with a profit. The second party, policyholders, are risk adverse individuals who prefer to give up a portion of their income in order to transfer their risk of loss to professionals risk handlers. (    

  We have to assume that policyholder will act rational and will demand a fair premium to accept the transaction. Hence, insurance companies must be really careful for the premiums they charge. Two of the most significant variables in pricing model are the probability of a loss to arise and the risk type of each policyholder. High risk agents, their probability of the loss to occur is above the average will be charged with a higher premium. On the other hand Low risk agents will grasp the benefit of their low probability of a claim with lower premiums (Hargreaves, S. et al, 1992).   

  In this part I must explain why people need to be insured. It not have to be mentioned that all people every day bare different kind of risks, financial, property, life, medical and other. Thus, they must be protected from their risks. Insurance companies give us the opportunity to trade our risks for a specific amount of money. A simple example from Rothchild and Stilitz(1976) will help the reader to understand the need of insurance. Think about an individual whose income is (W), but if a specific loss (accident, death, illness, financial loss, property loss) occur; his or his family income will be decreased by the amount of (d) which is the loss. Since most of the individuals are risk averse or neutral will try to avoid the loss of (d), or minimize it. They can succeed that by purchasing an insurance contract for the specific risk and pay a premium (a1) to an insurance company. Thus, the individual's income now will be (W- d -a1+a2) if the loss occur and (W-a1) if not. (a2) is the compensation the insured will receive from the insurer in the event of loss. In addition, if the individual does not buy insurance his income will be (W, W-d) in both of the states. Consequently, a person must choose between two situations, one with insurance and the other without. We should expect a rational individual will try to find in which of the two states his utility function is higher. His decision will be based on the beliefs he has for the likelihood of the loss to happen, his risk type, if he think that the premium (a1) is fair and in which point the loss will affect his well being. 

  Life insurance is just a branch of insurance industry, although is one of the most important and old branches. The most priceless good of any person is his own life and his beloved family members. Hence, what is more important to protect your life and life of your relatives? Furthermore, a death or disability of the person who mainly produce income for the family not only is tailspin but it may also drive to poorness the whole family with severe consequences. Moreover, when he, or she is a parent with young children. A life insurance contract cannot protect a person from dying or get sick; neither can take the pain from the family. The purpose of a life insurance contract is to compensate the family in case of a death in order to afford living, or pay the medical expenditures, a person will need in case of a disability, complementary with a steady income for  the rest of the sick person life or o a fix amount of money. Someone could think life insurance as a bet between the insurance company and the insured. Insurer bets that the cumulative amount of moneys through premiums that is going to gather will be more than the amount of money they will have to compensate the unfortunate clients. The other party bets every month the premium so as to be protected (A Consumer Guide, 2005).

  The distinct difference of life insurance to all other branches of insurance is that in life insurance contracts the insured person is not the one who will be compensated. The policyholder because signing the contract and start paying the premium he has to declare one to three persons as those who will receive the compensation in case the insured dies.


  1. A Consumer Guide, 2005, Questions and Answers about Health Insurance, Agency for Healthcare Research and Quality, Americas Life Insurance Plans.
  2. Browne, M. and Kihong, K., 1993, An International Analysis of Life Insurance Demand, The Journal of Risk and Insurance, Vol. 60, No. 4.
  3. Dickson, P., (1960), “Sun Insurance Office Ltd, 1710-1960: the history of two and a half centuries of British insurance”, Oxford University Press.
  4. Fisher, I., 1930, The Theory of Interest, Macmillan.
  5. Hargreaves, S., Hollis, M., Lyons, B., Sugden, R. and Weale, A., 1992, ‘The Theory of Choice: A Critical Guide', Blackwell Publishers Inc, Oxford UK.
  6. Harrington, S. and Niehaus, G., 2003, Risk Management & Insurance, McGraw-Hill, 2nd Edition, NY.
  11. Marshall, A., 1920, Principles of Economics, Eight Edition, Macmillan.
  12. New York Times Editorial, Article about Life Insurance, In Zelizer-Rotman, V., 1983, Moral and Markets
  13. Rothschild, M. and Stiglitz, J., 1976, Equilibrium In Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, The Quarterly Journal of Economics, Vol 90, No. 4.
  14. Spirou, E., 2000, Insurance Market Review, Asfalistiko Nai, Vol. 10
  15. Yaari, M., 1965, Uncertain Lifetime, Life Insurance, and the Theory of the Consumer, Review of Economic Studies, Vol. 32, No. 2.
  16. Zelizer-Rotman, V., 1983, Moral and Markets, New York: Columbia Press University Press.