Mental Accounting, Access Motives, and Overinsurance*

• Published date: 01 April 2020
• DOI: http://doi.org/10.1111/sjoe.12336
• Date: 01 April 2020

Scand. J. of Economics 122(2), 675–701, 2020

DOI: 10.1111/sjoe.12336

Mental Accounting, Access Motives, and

Overinsurance*

Markus Fels

University of Dortmund (TU), DE-44227 Dortmund, Germany

markus.fels@udo.edu

Abstract

The access motive for insurance posits that insurance derives its value from providingaccess to

a loss remedy that is unaffordable without insurance. I explore the potential of this alternative

insurance motive to explain attitudes towards modest risks, and I argue that mental accounting

makes the access motive relevant for understanding both the popularity of warranties and the

avoidance of deductibles.The value of partial insurance is shown to critically depend on the way

in which the insurer pays benefits.This can explain several empirical regularities that are difficult

to reconcile within existing models.

Keywords: Access motive;deductibles; extended warranty; insurance demand; mental accounting

JEL classification:D11; D81; G22

I. Introduction

Insurance decisions have become an increasingly popular topic in behavioral

economics. This is because, on the one hand, insurance markets are

an integral part of modern economies, and, on the other hand, these

markets have produced plenty of evidence documenting departures from

the benchmark of expected-utility theory (Kunreuther et al., 2013). The

avoidance of deductibles and the purchase of modest-risk insurance, such

as extended warranties or telephone wire insurance, are two types of

behavior that have typically been described as instances of overinsurance

(Rabin and Thaler, 2001). In contrast to standard predictions, consumers are

willing to accept large premium increases in exchange for a full elimination

of or at least a decrease in the deductible prescribed by an insurance

policy (Sydnor, 2010; Barseghyan etal., 2013). Similarly, there is extensive

demand for modest-stakes insurance such as extended warranties, despite a

*I thank the participants of M-BEES 2015, EARIE 2015, the CEAR/MRIC Workshop on

Behavioral Insurance 2015, and the seminar audience at Karlsruhe Institute of Technology, in

particular, Clemens Puppe and Philipp Reiss for valuable feedback. I greatly benefited from

comments by two anonymous referees.

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The editors of The Scandinavian Journal of Economics 2018.

676 Mental accounting, access motives, and overinsurance

general consensus among economists that these insurances are financially

exploitative.1

While several deviations from the predictions of the standard expected-

utility theory of insurance are documented, Nyman (1999, 2003) proposes

the access motive as an insurance motive distinct from risk aversion. Having

experienced the loss of an asset, an individual might not possess the funds

necessary to remedy the loss. An insurance policy eliminates, or at least

alleviates, this budget risk, thereby granting the individual access to the

remedy that financial constraints would otherwise inhibit. In this way, an

insurance policy protects the consumption value of the insured asset. This

is not the case in the standard view of insurance, in which insurance is a

device to mitigate the consumption variation due to the cost of the remedy.

In this paper, I explore the role of the access motive for understanding

deductible avoidance and modest-risk insurance. The paper makes two

contributions.

First, it extends the literature on the access value of insurance by

deriving the value of partial insurance. Investigating the attitudes towards

deductibles that the model predicts, I find a rational reason for deductible

avoidance based on the common practice of insurance benefits to be paid

conditionally. If the insuree is unable to afford the cost-sharing requirement

in case of need,2no insurance benefits are paid. If an insuree foresees such

a possibility, he views partial insurance as probabilistic insurance.3The

extent of deductible avoidance is a function of the value of the insured

asset. This can explain the evidence for a context-dependence of deductible

avoidance (Sydnor, 2010; Barseghyan et al., 2011, 2013). I show how the

effect of income on the value of insurance varies with the size of the

covered risk and with the extent of coverage. This can help rationalize

seemingly contradictory findings on how income affects insurance take-

up.4Furthermore, the value of insurance depends on how the insurance

pays benefits in case of a loss: unconditionally, conditional on payment of

1For example, see Baker and Siegelman (2014) for a good exposition of the basic argument. In

a much noted article “The warranty windfall”, published in Businessweek in 2004, it is reported

that “profits from warranties accounted for all of Circuit City’soperating income and almost half

of Best Buy’s”(see http://www.bloomberg.com/bw/stories/2004-12-19/the- warranty-windfall).

Ten years later, Warranty Week noted in its 2014 Mid-Year Service Contract Report that

“[c]onsumers will pay nearly $40 billion this year for product protection plans, despite the

best efforts of watchdogs who tell them not to” (see http://www.warrantyweek.com/archive/

ww20141009.html).

2Forevidence of affordability barriers with regard to cost-sharing requirements in health insurance

markets, see Collins et al. (2015) and Rae et al. (2017).

3While partial insurance does not cover the entire loss, but pays benefits in all loss states,

probabilistic insurance does not pay benefits in all loss states.

4A negative effectof income is often found for insurance against modest risks such as warranties

(Chen et al., 2009; Abito and Salant, 2018) and telephone wire insurance (Cicchetti and Dubin,

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The editors of The Scandinavian Journal of Economics 2018.