Puzzles of insurance demand and its biases: A survey on the role of behavioural biases and financial literacy on insurance demand

This paper reviews the puzzles of insurance demand, and provides an overview of behavioural-based explanations on the concept of underinsurance. In particular, the study outlines the biases (among myopia, narrow framing and others) that help to explain the existence of those puzzles. The results indicate that biases do motivate the chances of underinsurance through sub-optimal probability weighting or wrong probability estimation of risks. We discuss that the literature has fallen short in providing possible solutions for the puzzles, with this study proposing financial literacy treatments, that aim at improving knowledge and use of finance, as a systematic solution.