Framing of risk and preferences for annual and multi-year flood insurance q W.J. Wouter Botzen a,⇑ , Joop de Boer a , Teun Terpstra b a Institute for Environmental Studies, VU University Amsterdam, De Boelelaan 1087, 1081 HV Amsterdam, The Netherlands b HKV Consultants, Lelystad, The Netherlands article info Article history: Received 5 December 2012 Received in revised form 21 May 2013 Accepted 26 May 2013 Available online 1 June 2013 JEL classification: D81 G22 PsycINFO classification: 3140 3920 Keywords: Communication Decision making Framing Preference uncertainty Risk perception abstract The decision of many individuals in floodplains to not purchase flood insurance may impair the risk-spreading function of flood insurance markets. This study estimates the effective- ness of risk communication frames and insurance policy conditions in increasing demand for flood insurance. It is examined how communication interacts with individual frames about the flood hazard that are rooted in regulatory focus theory. A choice experiment elic- its willingness-to-pay (WTP) for annual and multi-year flood insurance, using of a survey of a representative sample of 1250 households. The statistical method is a mixed logit model that accounts for heteroskedasticity arising from stated choice certainty. The communica- tion frames considerably increase WTP compared with a control group. This effect of com- munication is positively related to an individual’s degree of prevention motivation. Moreover, we find that demand for flood insurance can be increased by introducing multi-year policies, as long as the contract duration is not too long. Ó 2013 Elsevier B.V. All rights reserved. 1. Introduction A challenge for traditional economic theory is that many homeowners in floodplains do not purchase flood insurance (e.g. Krantz & Kunreuther, 2007; Kunreuther & Pauly, 2004). For instance, many homeowners in the USA do not purchase flood insurance which has been provided by the National Flood Insurance Program (NFIP) at premiums that are close to, or in some cases even below, the expected value of flood damage (Browne & Hoyt, 2000; Kriesel & Landry, 2004; Michel-Kerjan & Kousky, 2010). This can be explained by the attitude of many people that ‘‘a flood will not happen to me’’ (Kunreuther, 1978). Economic experiments have confirmed that indeed many individuals neglect low-probability risk and do not purchase insurance, while another large group has a willingness-to-pay (WTP) that is considerably above the expected value of the loss (Laury, Morgen- McInnes, & Swarthout, 2009; McClelland, Schulze, & Coursey, 1993; Schade, Kunreuther, & Koellinger, 2011). Similar behavior has been observed in stated preference surveys of flood insurance demand (Botzen & van den Bergh, 2012a, 2012b). 0167-4870/$ - see front matter Ó 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.joep.2013.05.007 q Wouter Botzen has been responsible for the design, the statistical analysis and the reporting of the results of the choice experiment. Joop de Boer and Teun Terpstra have contributed to the overall research strategy in which the choice experiment was embedded. ⇑ Corresponding author. Tel.: +31 205983979; fax: +31 20598955. E-mail address: wouter.botzen@ivm.vu.nl (W.J.W. Botzen). Journal of Economic Psychology 39 (2013) 357–375 Contents lists available at SciVerse ScienceDirect Journal of Economic Psychology journal homepage: www.elsevier.com/locate/joep