Application of behavioral economics in the insurance market

Abstract

Behavioral economics has shown that decision making in contexts of uncertainty does not always follow the principles of rationality proposed by neoclassical economic theory. In the insurance market, individuals are often influenced by cognitive biases such as loss aversion, illusion of control, optimism bias and the framing effect, which alter their perception of risk and affect their insurance purchasing behavior. Using prospect theory and the concept of bounded rationality, this study examines how these biases impact the dynamics of the insurance industry and consumers’ decisions. The case of the Peruvian market is analyzed, where low insurance penetration is conditioned by cultural factors, institutional distrust and traditional patterns of financial consumption. From an empirical approach, it is shown that economic uncertainty and disruptive events, such as financial crises and natural disasters, generate fluctuations in the demand for insurance. The findings highlight the need to apply strategies based on behavioral economics to improve the efficient allocation of resources in the insurance market. This can be achieved through the use of positive framing, appropriate incentives and public policies aimed at reducing information asymmetry and encouraging more informed decisions by consumers.