Entrepreneurs’ behavioural biases, risk misperception and company underinsurance

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Abstract

We analyse the effect of behavioural biases on entrepreneurs’ decisions to insure their firms against different kinds of corporate risks. We use a large sample of 2,295 Italian small and medium enterprises (SMEs), finding that they under-insure themselves. Since SMEs should insure more – in proportion – compared to bigger companies, analysing the reasons for this underinsurance is relevant to improve entrepreneurs’ decisions and help their firms, but also from a policy-making point of view. We link corporate insurance choices with the entrepreneurs’ personal characteristics and behavioral traits as well as with their households’ financial choices. Our methodology uses stepwise regressions to discern which variables are statistically significant. In our results, we find that entrepreneurs not only underinsure their firms but also themselves, thus exposing themselves, their firms and their families to high idiosyncratic risk. We find that these suboptimal decisions are affected by behavioural biases such as overconfidence, over optimism, risk misperceptions, and stubbornness, even though in a not straightforward manner. We measure both the overall effect on the number of insurances underwritten and on the specific type of insurance contract. In general, we find that relatively bigger firms do buy more insurance, and that trust in insurance companies is a key driver to insurance purchasing, as well as the estimated probability of suffering damages in the future. In contrast, entrepreneurs do underwrite fewer insurance contracts if their firms caused or suffered damages in the past, but also if they possess personal insurances, thus treating them as substitutes for firm insurance. Since SMEs represent a very important part not only of the Italian economy but also of the economy of many other countries, analyzing their insurance-related decisions is relevant because understanding the determinants that may lead entrepreneurs to mitigate the risks they face is beneficial not only for them and their firms but also for the economy as a whole.

Keywords: Behavioural Biases, Entrepreneurs, Risk Misperceptions, Small and Medium Enterprises (SMEs), Underinsurance

Authors’ individual contribution: Conceptualization - E.M.C., F.C., and P.Z.; Methodology - E.M.C. and F.C.; Formal Analysis - F.C.; Resources - P.Z.; Data Curation - E.M.C., F.C., and P.Z.; Writing - Original Draft – E.M.C., F.C., and P.Z.; Writing - Review & Editing – E.M.C., F.C., and P.Z.; Visualization – E.M.C., F.C., and P.Z.; Supervision – E.M.C.; Project Administration – E.M.C.; Funding Acquisition – E.M.C.

JEL Classification: G02, G22, G32

Acknowledgement: We thank ANIA, the Italian National Association of Insurance Firms (aka, ANIA, “Associazione Nazionale fra le Imprese Assicuratrici”) for providing us the dataset.

Received: 04.03.2019
Accepted: 17.12.2019
Published online: 19.12.2019

How to cite this paper: Cervellati, E. M., Corea, F., & Zanghieri, P. (2019). Entrepreneurs’ behavioural biases, risk misperception and company underinsurance. Risk Governance and Control: Financial Markets & Institutions, 9(4), 49-66. https://doi.org/10.22495/rgcv9i4p5