Journal of Economic Behavior & Organization 82 (2012) 151166

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Journal of Economic Behavior & Organization

journal homepage: www.elsevier.com/locate/jebo

Risk attitudes to low-probability climate change risks: WTP for ood

insurance
W.J.W. Botzen a, , J.C.J.M. van den Bergh a,b,c,d
a
Institute for Environmental Studies, VU University Amsterdam, De Boelelaan 1087, 1081 HV Amsterdam, The Netherlands
b
ICREA, Barcelona, Spain
c
Institute of Environmental Science and Technology & Department of Economics and Economic History, Universitat Autonma de Barcelona, Spain
d
Faculty of Economics and Business Administration, VU University Amsterdam, The Netherlands

a r t i c l e i n f o a b s t r a c t

Article history: Natural disasters may increase in frequency and severity in the future as a result of climate
Received 31 July 2010 change, which is likely to have an impact on the demand for natural disaster insurance.
Received in revised form 19 January 2012 Insights about individual risk beliefs and behavioural responses to changing risks are rele-
Accepted 25 January 2012
vant for insurers, as it allows them, for example, to estimate the demand for new insurance
Available online xxx
products that cover weather-related damage. This study elicits individual risk beliefs and
the demand for low-probability, high-impact ood insurance using the contingent valu-
JEL classication:
D81
ation survey method among approximately 1000 homeowners in the Dutch river delta.
G22 This study is of practical relevance since currently ood insurance is not available in the
Netherlands, while insurers have been considering to provide such insurance. Individuals
Keywords: generally do not behave in accordance with the expected utility model since a signicant
Contingent valuation proportion of homeowners neglect the low-probability ood risk. The willingness-to-pay
Flood insurance demand
(WTP) of those individuals who demand ood insurance is on average considerably higher
Prospect theory
than the expected value of the ood risk they face. Moreover, the WTP for ood insur-
Risk aversion
Risk ladders ance is less than proportionally related to increased ood probabilities that were presented
Risk perceptions to respondents in the questionnaire. Individuals follow a process of Bayesian updating of
ood probabilities, since perceptions of ood risk are an important determinant of the WTP,
while objective risks derived from geographical characteristics inuence the WTP to a lesser
extent. Communication of baseline probabilities and changes in ood probabilities using
risk ladders facilitate the comprehension of risk by respondents, and has a considerable
effect on the level of the WTP and its sensitivity to probability changes. The results indicate
that the current ex post public compensation scheme of ood damage lowers demand for
private insurance.
2012 Elsevier B.V. All rights reserved.

1. Introduction

Several studies have examined the demand for insurance against low-probability, high-impact events, such as natural
disasters (e.g. McClelland et al., 1993; Kriesel and Landry, 2004). A common nding about decision making under risk is that
many individuals either neglect or overweight low-probability risks and that individuals are more sensitive to outcomes
that are framed as losses than as gains due to loss aversion. This behaviour is consistent with prospect theory (Kahneman
and Tversky, 1979; Tversky and Kahneman, 1992), which is currently the most inuential theory of decision making under

Corresponding author. Tel.: +31 20 59 83979, fax: +31 20 59 89553.

E-mail addresses: wouter.botzen@ivm.vu.nl (W.J.W. Botzen), jeroen.bergh@uab.es (J.C.J.M. van den Bergh).

0167-2681/$ see front matter 2012 Elsevier B.V. All rights reserved.
doi:10.1016/j.jebo.2012.01.005
152 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

uncertainty (Starmer, 2000; Bleichrodt et al., 2009). Individuals have a zero willingness-to-pay value (WTP) for insurance if
they neglect the low probability risk. Revealed preference data on insurance demand in the USA indicates that many home-
owners neglect ood risk and fail to purchase partly subsidized ood insurance policies (Kunreuther, 1978; Kunreuther et al.,
2009). However, in prospect theory individuals generally overweight low-probability risk (Schmidt and Zank, 2008), which
induces them to be more risk averse with respect to low probability risk and have a positive WTP value for insurance against
natural catastrophes. Therefore, these risk attitudes have very different implications for insurance demand. Understanding
what kind of individual risk attitudes are present in the population is relevant information for insurers who want to assess
the WTP for insurance coverage against low-probability natural disaster risk.
Climate change is expected to increase the frequency and severity of certain natural disasters (IPCC, 2007). This may pose
considerable challenges for the insurability of natural disaster risks. Insurers may be reluctant to provide insurance coverage
for natural disasters if climate change would continuously increase such risks over time and represents a systemic risk. This
in turn might require continuous adjustments of premiums over time (Charpentier, 2008). Moreover, climate change may
increase the severity of natural disasters, such as bigger storms, which cause many losses at the same time and are thus
difcult to insure (Kousky and Cooke, 2009). Knowledge about how individuals respond to the projected change in natural
disaster risks due to climate change is very relevant for insurers, but has been examined by only few studies so far (Botzen
and van den Bergh, 2009). In particular, information on how insurance demand changes in response to higher natural disaster
risks is useful for assessing to what level premiums can be increased without losing too much market share.
Two main issues are of particular interest in examining the effects of climate change on insurance demand. First, it is
relevant to investigate whether individuals neglect the low-probability risk, and whether this behaviour changes if risk
increases due to climate change. Second, an increase in the likelihood of disasters is likely to inuence demand for insurance
by individuals who do not neglect the risk under current climate conditions and, therefore, already have a positive WTP
value.
Individual risk beliefs or risk attitudes have been measured using economic experiments that often use students or small
groups of people as convenience samples (e.g. Fox and Clemen, 2005; Abdellaoui et al., 2007; Dillon and Tinsley, 2008;
Bleichrodt et al., 2010). Alternatively, risk beliefs can be elicited using contingent valuation surveys of a large representative
sample. Such a survey can be a reliable method to estimate how a large part of a population values insurance or mitigation
measures against ood risk or changes in ood risk.1 Only few studies of this kind have been conducted (Daun, 2000; Brouwer
et al., 2008; Akter et al., 2009). The present contingent valuation study contributes to this literature by examining the WTP
for low-probability, high-impact insurance against river ooding in the Netherlands under the current ood probability and
increases in the likelihood of ooding due to climate change. Of particular interest is whether individuals neglect the low-
probability ood risk and how WTP relates to increases in ood probabilities presented to respondents in the questionnaire.
Our survey method allows for measuring risk attitudes and risk perception at the individual level and estimating their
inuence on insurance demand, which is rarely possible in actual insurance decisions and has hardly been addressed in
empirical work (Barsky et al., 1997; Wakker et al., 2007). Several authors suggest that individuals follow an updating process
based on prior perceptions of risk when they are provided with new information about the risk (e.g. Viscusi and OConnor,
1984; Viscusi, 1989; Cameron, 2005; Delavande, 2008). As a consequence, decision making under risk, such as determining
whether to purchase ood insurance, may be driven by a combination of prior risk perceptions and the new information
provided to individuals, which is examined in this study.
In general, individuals nd it difcult to understand differences in probabilities, which complicates the use of surveys to
assess the WTP for risk changes (Hammitt and Graham, 1999). To overcome this problem, surveys can include visual aids,
such as risk ladders, that communicate probabilities in questionnaires aimed at facilitating comprehension of the risk by
respondents (e.g. Corso et al., 2001). Explaining probabilities and changes in probabilities with risk ladders can have two
effects on the stated WTP for ood insurance, and it is these effects which are examined in this study. First, it may inuence
the level of the WTP. Second, it may affect the dependency of the WTP on probability changes, which is an indicator of
sensitivity to scope in this application. Our study estimates the independent effect of communicating the baseline (current)
probability and probability changes using risk ladders on the level of the WTP for ood insurance, irrespective of probability
changes. In addition, the inuence of showing the risk ladders on the relation between probability changes and the WTP is
examined. Such effects of risk information on insurance demand have hardly been studied (Wakker et al., 2007).
This study is of practical interest for insurers and the government. At present, ood insurance is not available in the
Netherlands, but under certain conditions the government can, according to the Calamities and Compensation Act (Wet
Tegemoetkoming Schade bij Rampen en Zware Ongevallen WTS), partly compensate damage caused by large-scale oods.
But a publicprivate partnership to insure ood damage could be a more efcient way to spread ood risk (Botzen and van
den Bergh, 2008). An advantage of insurance, compared with the government compensation scheme, could be that insurance
provides more nancial security to individuals than ad hoc and partial relief of damage by the government, which depends on
a political decision. Moreover, insurance can act as a price signal of risk that provides an incentive to policyholders to invest
in the mitigation of ood damage and encourages land development in low-risk regions (Shilling et al., 1989; Botzen et al.,

1
A disadvantage of a stated preference survey is that risk attitudes are elicited in a hypothetical setting. Holt and Laury (2002) show that even though
overall risk attitudes that have been elicited in experiments with and without real monetary incentives are rather similar, individuals appear to be more
risk averse with real payoffs if choices involve large amounts of money.
 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166 153

2009a). The nature of ood risk in the Netherlands, with large correlation of risk and potentially catastrophic damage, has
made several authors suggest that a role for the government would be required as a reinsurer of last resort if ood insurance
markets were to emerge (Jongejan and Barrieu, 2008; Botzen and van den Bergh, 2008). Insurers should pay a price for this
government coverage and charge premiums that reect risk. A reason for this is that experience with partly subsidized ood
insurance premiums in the USA has shown that too low insurance premiums can result in too much development in high
risk areas near the coast, which may be predominantly occupied by wealthy citizens (Kousky and Kunreuther, 2009). The
current study can provide useful insights for insurers and the government into the potential demand for ood insurance.
In addition, it examines the effect on the WTP for ood insurance of the current institutional setting, characterized by the
availability of partial compensation of damage by the government.
The remainder of this paper is organized as follows. Section 2 discusses ood risk in the Netherlands. Section 3 explains
methods applied to communicate low probabilities in surveys. Section 4 describes the survey. Section 5 presents the statistical
model and the results. Section 6 concludes.

2. Flood risk in the Netherlands

Flood risk has been a major risk management issue in the Netherlands for centuries because of its low-lying delta.
Approximately, 53% of the Dutch population live in areas that are located below sea or river water level. These areas are
vulnerable to storm surge and the ooding of several major European rivers that discharge into the North Sea. Traditionally,
the government has been responsible for ood risk management in the Netherlands. A comprehensive system of dikes,
sluices, dams, and storm surge barriers with a certain safety level aim to protect low-lying areas from ooding. Several
oods have occurred in the past: namely, a catastrophic storm surge in 1953, smaller river oods in 1993 and 1995, and a
local dike failure in 2003. Climate change projections for the Netherlands indicate that ood risk may increase in the future
as a result of a combination of sea level rise, more extreme precipitation, and peak discharges of rivers (Hurk van den et al.,
2006; Ward et al., 2008; Aerts and Botzen, 2011). Several investments are being made and planned to accommodate rising
risks in the Netherlands, such as the strengthening of coastal protection and river dikes. In addition, other measures can be
useful to limit risk of river ooding, such as the widening and deepening of rivers, adapting property in high-risk areas to
limit ood damage and introducing ood insurance (Kabat et al., 2005).
The proposal of Botzen and van den Bergh (2008) to introduce a publicprivate partnership in insuring ood risk in the
Netherlands with the government as an insurer of last resort would provide incentives for the governments to invest in
ood-protection infrastructure, while private insurers provide coverage for damage caused by non-catastrophic ooding.
For an effective public risk management policy it is of interest to know individual risk beliefs and demand for adaptation and
insurance options that accommodate increasing risks. This survey examines demand for ood insurance, and in particular,
elicits WTP for insurance against river ooding under the current safety level of 1 in 1250 and climate change scenarios in
which ood probabilities increase up to 1 in 400. The scenarios of increased ood probabilities used in the survey are within
the range of projected increases in the probability of ooding due to climate change in our sample area for the year 2050 (te
Linde et al., 2010).

3. Methods to communicate low probabilities in surveys

Individuals often nd it difcult to understand probability concepts and especially to assess the likelihood of low-
probability events (Viscusi, 1998). By carefully explaining low probabilities of disastrous events, such as ooding, individuals
can choose the appropriate level of protection or insurance coverage against such risks (Kunreuther et al., 2001). There is a
substantial literature on the valuation of small risks and the reduction in risks using surveys. Common applications assess the
value of a statistical life based on the WTP for changes (usually reductions) in environmental, health or accident-related mor-
tality risks (Vassanadumromgdee and Matsuoka, 2005; Alberini et al., 2004, 2006, 2007; Bhattacharya et al., 2007; Houtven
van et al., 2008). These studies use several risk communication methods, which provides an excellent basis for the design of
the present survey.
Visual aids can improve the comprehension of probability concepts by respondents in surveys (e.g. Connelly and Knuth,
1998; Corso et al., 2001). For example, several studies use risk ladders to communicate baseline, or changes in, probability
(e.g. Hammitt, 1990; Vassanadumromgdee and Matsuoka, 2005). A risk ladder shows the baseline probability on a probability
scale, together with other risky events that the respondent commonly faces. The purpose is to show how large the probability
to be valued is relative to probabilities of other damaging events with which respondents may be more familiar. Depicting
both the baseline and the new probability on the risk ladder can show changes in probability. An arrow can be used to
indicate the change in the probability. Such a risk ladder illustrates the size of the change, and also how the new probability
compares with the other risks. In general, Dutch households are accustomed to purchase insurance for more common risks,
such as those of re and theft. A comparison of the ood probability with probabilities of events already covered by insurance
(and whom which individuals are more familiar) on a risk ladder is likely to enhance understanding of the relative size of
the probability of ooding.
154 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

4. Explanation of the questionnaires

The design of the survey including the pre-test and structure of the questionnaires is discussed in detail in the online
appendix. Botzen et al. (2008) give a full description of the survey and an overview of the questions, which includes questions
on: the experience of the respondent with ooding and evacuation; the causes of ooding; individual perceptions of ood
risk; and on the socio-economic characteristics of the respondent. The insurance product valued completely covers damage
to both buildings and home contents caused by river ooding.2 Demand for ood insurance is elicited by means of three
contingent valuation questions using the payment card method (see online appendix and Appendix B). The rst one elicits
the WTP under the current ood probability of 1/1250, while the other two elicit the WTP for scenarios in which the ood
probability increases to 1/600 and 1/400 as a result of climate change. Careful attention has been given to communicate
these probabilities to the respondents by means of risk ladders (see Appendix A). The linear risk ladder depicts the risk
of car-theft, re in a residential building, ooding, car-re, and the risk of a fatal trafc accident.3 All adverse events are
expressed as yearly probabilities. Although the consequences of the events on the risk ladder differ, the risk ladder provides
useful insights for respondents into the relative probabilities of these events, which individuals often nd difcult to assess
without such information. The effect of risk communication on the WTP for insurance can be estimated because the risk
ladders are shown to only half of the respondents. In addition, the inuence of the availability of government compensation
on the WTP for ood insurance is examined. This is done by eliciting WTP in different versions of the questionnaire, in
which it is either explained that compensation for ood damage may be granted by the government according to the current
regulation, or that such government compensation will no longer be granted (see online appendix).
The survey was administered over the Internet using Sawtooth CBC software. This computer-based method has the
advantages that: follow-up questions can be automated; high quality graphics can be included; interviewer effects can be
avoided; and a geographically-spread sample can be obtained at relatively low costs. Respondents were selected from the
consumer panel of Multiscope and contacted by e-mail.4 This e-mail did not specify the topic of the survey, to prevent
selection bias. The sample consists of random draws of panel members who live in the river delta area of the Netherlands
with a common ood probability level of 1 in 1250. The sample was set up to be representative for Dutch citizens who own
a house up to the age of 60. Fewer older individuals are represented in the Internet sample, because seniors are generally
less active on the Internet than younger people. The survey elicits demand for ood insurance that covers damage to both
home contents and buildings, which is why the sample excludes tenants, since they do not bear the costs of ood damage
to their homes. About 55% of Dutch households own their house. The survey starts with a selection question to ensure that
only respondents who own a house continue. A total of 1140 respondents lled out the questionnaire, and 982 observations
remained after excluding respondents who live outside the sample area or in apartments on the rst oor or higher. The
survey was removed from the Internet once the desired number of respondents was reached.5

5. Results of the survey

5.1. Sample characteristics

Our sample has slightly more male (58%) than female respondents. It may be that the Internet survey method attracts
more male respondents, or that males are more likely to complete the survey than women because they may predominantly
deal with the nancial matters of the household, such as the purchase of insurance. Approximately, 50% of the respondents
have at least one child who still lives at home and 39% have a Bachelors or Masters degree as highest education level. On
average respondents are 46 years old. The proportion of respondents who are older than 60 is about 11%, which is smaller
than is the case in the actual Dutch population. We do not regard this as troublesome in this application since the increased
ood risk posed by climate change is less applicable to older respondents since it will take several decades before the altered
risk materializes. The average after-tax household income is the answer category between D 2501 and D 3000 per month,
which is close to the average after-tax income of a household who owns a house in the Netherlands, namely D 3025 per
month (Statistics Netherlands, 2008).

5.2. Descriptive statistics of the willingness-to-pay questions

The results of the contingent valuation questions are shown in Table 1. The percentage of total respondents who are
willing to insure (WTI), the mean willingness-to-pay of all respondents (WTP), and the mean WTP conditional on wanting
insurance (CWTP) are shown for the different ood probability scenarios and versions. These three measures convey different

2
It has been shown that the way the insurance product is framed may have an important effect on its perceived attractiveness by individuals (e.g. Johnson
et al., 1993). In general, it has been observed that individuals nd insurance products that completely eliminate a risk considerably more attractive than
ones that provides partial coverage (Tversky and Kahneman, 1981).
3
Trafc risks are often given as an anchor in risk belief surveys (Lichtenstein et al., 1978; Viscusi and Zeckhauser, 2006).
4
For more information, see www.multiscope.nl.
5
The use of the consumer panel of Multiscope does not allow us to calculate the exact response rate to our survey since the survey was removed from
the Internet once a pre-specied quota of completed questionnaires was reached. On average, response rates of the consumer panel are well above 20%
(www.mutiscope.nl).
 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166 155

Table 1
Descriptive statistics of willingness-to-insure (WTI), mean willingness-to-pay (WTP), and mean conditional willingness-to-pay (CWTP).

Flood probability and version WTI WTP CWTP

% respondents D per month D per month

Flood probability 1 in 1250

Government relief 24.2% 3.07 12.90
with risk ladder [0.59] [1.92]
Government relief 32.7% 2.49 7.85
without risk ladder [0.39] [0.92]
No government relief 33.6% 3.21 9.62
with risk ladder [0.68] [1.84]
No government relief 38.0% 4.14 10.97
without risk ladder [0.62] [1.41]
Flood probability 1 in 600
Government relief 30.1% 4.27 14.56
with risk ladder [0.74] [2.00]
Government relief 40.0% 4.47 11.72
without risk ladder [0.73] [1.60]
No government relief 44.9% 5.85 13.15
with risk ladder [1.14] [2.39]
No government relief 44.2% 5.13 12.04
without risk ladder [0.67] [1.33]
Flood probability 1 in 400
Government relief 35.5% 4.79 13.62
with risk ladder [0.79] [1.83]
Government relief 40.0% 4.96 12.58
without risk ladder [0.78] [1.64]
No government relief 50.8% 6.32 12.53
with risk ladder [0.85] [1.48]
No government relief 46.4% 6.21 13.56
without risk ladder [0.80] [1.49]

Note. Standard errors are given in-between brackets.

information relevant for policy makers and insurers. The WTI is an indicator of the percentage of homeowners in the river
delta who are willing to pay a positive amount for ood insurance. WTP is an indicator of the mean of WTP for ood insurance
of all homeowners, and is the relevant measure for policy makers who are interested in the welfare effects of introducing
ood insurance. CWTP is the mean WTP of homeowners who are willing to pay a positive amount for ood insurance. It
indicates the potential revenue per policy, excluding homeowners who do not want the insurance. Comparing CWTP with
the mean expected value of the loss indicates how much individuals who demand ood insurance are willing to pay for the
insurance on top of the expected reimbursements of ood losses by the insurer.
WTI is between 24% and 50% depending on the ood probability, availability of compensation of ood damage by the
government, and use of risk ladders to communicate risk.6 The large proportion of respondents with a zero WTP value has
been observed in other studies that estimate insurance demand for low probability hazards (e.g. McClelland et al., 1993). It
indicates that many individuals dismiss the low probability ood risk altogether (Kunreuther and Pauly, 2004). The neglecting
of risk contradicts expected utility theory and may be consistent with prospect theory (Kahneman and Tversky, 1979). Also,
Wakker et al. (1997) show for an application to probabilistic insurance that insurance demand is better described by prospect
theory than by expected utility. WTI is higher when the ood probability is larger in all versions of the questionnaire, which
suggests that fewer homeowners neglect the risk if the probability rises. Slovic et al. (1977) argue that individuals only buy
insurance against low probability hazards if the probability exceeds a certain threshold, which varies across individuals.
An increase in probability reduces probability neglect as the probability exceeds the threshold for more individuals. The
absence of government compensation increases WTI.
The values of WTP and CWTP, which excludes zero WTP responses, have been elicited for an insurance policy that
provides complete coverage for ood damage. The mean WTP for ood insurance is between D 2.49 and D 6.32 per month in
the different questionnaire versions and scenarios of the ood probability, while mean CWTP is between D 7.85 and D 14.56
per month. It is relevant to compare CWTP with the expected value of the loss per policy, because it indicates how much
individuals are willing to pay for ood insurance on top of the expected ood risk. This risk premium that individuals are
willing to pay for ood insurance can be computed as:

Risk premium = CWTP ood probability expected ood damage (1)

6
In total, 50, 67, and 77 protest responses with a zero WTP have been excluded from, respectively, the contingent valuation questions with 1/1250, 1/600
and 1/400 ood probabilities. Such responses are motivated by individuals saying that they do not believe that ood damage is not already covered, do not
believe or accept the stated ood probability, do not believe or accept the change in the ood probability, or do not believe that offering ood insurance is
possible. In Versions 3 and 4 a protest response may result from individuals not accepting the abolishment of government compensation.
156 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

The current ood probability in the sample area is 1/1250 per year. The expected ood damage for an average household
in the sample area is D 70,500. This value has been computed in Botzen and van den Bergh (2009) using estimates obtained
from ood damage models for the Netherlands.7 Therefore, the expected value of the ood damage which is dened as ood
probability expected ood damage per household equals D 4.7 per month.8 The CWTP is in between D 7.85 and D 12.90
per month for the ood probability of 1/1250 (see Table 1), which implies that the risk premium is in between D 3.15
and D 8.20 per month. Mean CWTP is between 70% and 175% higher than the expected value of the average ood damage
per house under current climate conditions, which indicates that individuals who demand ood insurance are willing to
pay considerably more than the expected value of the ood damage. The independent effects of the risk ladder, the ood
probability, and the availability of compensation of damage by the government on WTP will be examined in Section 5 using
the statistical model that controls for other explanatory variables.

5.3. A model of the WTP for ood insurance

A model is estimated that provides insight into the heterogeneity of household choice behaviour for ood insurance.
A single model is estimated for WTP elicited with the three contingent valuation questions. The WTP is transformed to a
logarithmic scale. This has statistical advantages, as problems with non-normality and heteroskedasticity are likely to become
less serious. In addition, estimation results become more intuitive since coefcients can be interpreted as elasticities if the
explanatory variable is also in logarithmic form, or as semi-elasticities otherwise. It is assumed that, for each respondent n,
the WTP depends on the probability pn , the expected ood damage dn , the presence of government compensation gn , and
individual characteristics xn . In particular we have:
3
WTPn = exp(1 xn ) exp(2 gn ) dn (pn )4 exp(n ) (2)

where xn is a 1 k vector of individual characteristics, and n is the error term.

5.3.1. Bayesian updating using perceived ood probabilities

Several studies show that individuals may follow a Bayesian updating of probabilities when they are provided with new
information about the likelihood of adverse events (e.g. Viscusi and OConnor, 1984; Viscusi, 1989). If individuals follow a
Bayesian updating of their ood risk, then the WTP depends not only on the ood probability stated in the questionnaire
but also on prior beliefs. A Bayesian model of updating risk is:
n + pn
p0n = (3)
+
where and  are the weights assigned to the prior belief about, respectively, the ood probability n , and the probability
presented in the survey pn (see Viscusi and OConnor, 1984; Viscusi, 1985a, b). Several studies have shown that individ-
uals do not strictly follow the Bayesian model of updating risk, and that there are many factors that inuence individual
judgments of risk, such as framing, salient information, and recency of the hazard (e.g. Kahneman et al., 1982; Cameron,
2005). Nevertheless, the Bayesian model provides a useful framework for examining the impacts of individual prior beliefs
of the ood probability and the probability stated in the survey on ood insurance demand. Our statistical model does not
impose Bayesian updating but merely empirically examines the inuence on WTP for ood insurance of individual ood risk
perceptions and the ood probability stated in the survey. The WTP equation with the Bayesian model is:
 4
3 n + pn
WTPn = exp(1 xn ) exp(2 gn ) dn exp(n ) (4)
+

We do not observe the prior beliefs about the ood probability. Nevertheless, the survey generates an estimate of beliefs
about the current return period and a broad range of indicators of risk perception. The latter can serve as proxies for prior
beliefs, enabling the modelling of Bayesian updating. In particular, several variables capturing the perceived risk of ooding
cn are used here as proxy variables for n in Eq. (2), as in Bhattacharya et al. (2007). Then taking the natural logarithm, the
regression equation becomes:

log WTPn = 1 xn + 2 gn + 3 log dn + 4 log pn + 5 cn + n (5)

5.3.2. Testing the effects of risk communication

The effect of showing the risk ladders on the sensitivity of the WTP to the ood probability is tested by creating an
interaction term RLn pn , where RLn is a dummy variable that equals 1 if a risk ladder is shown, and zero otherwise.

7
Botzen and van den Bergh (2009) compute the average ood damage per household in the Dutch river delta by dividing the total ood damage to
houses and home contents in the sample area obtained from the ood damage model of Wouters (2005) by the total number of houses in the sample area.
The resulting estimate of ood damage has been adjusted with the Consumer Price Index to reect the price level during the time of the survey.
8
Computed as 1/1250 70,500/12.
 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166 157

Including RLn directly tests the effect of showing the risk ladder on the level of the WTP, irrespective of the probability. The
model to test risk communication is then:

log WTPn = 1 xn + 2 gn + 3 log dn + 4 log pn + 5 cn + 6 log pn RLn + 7 RLn + n (6)

The effect of the probability is captured by 4 in the versions without the risk ladder and by 4 + 6 in the versions with
the risk ladder. If 4 = 1 or 4 + 6 = 1 then the WTP is proportional to the size of the risk change (Hammitt and Graham,
1999). Finally, this equation has to be adjusted to reect the panel structure of the data, since each individual is asked their
WTP under three different ood probabilities. This will result in the correlation of the errors for a given individual, which is
taken into account by a panel data model:

log WTPnt = 1 xn + 2 gn + 3 log dn + 4 log pnt + 5 cn + 6 log pnt RLn + 7 RLn + nt (7)

where n = 1, 2,. . .N and t = 1, 2, 3.

5.4. Estimation method and coding of the explanatory variables

Censoring of the data at zero is considered by estimating a random effects Tobit model. The WTP values are treated as
a positive continuous variable. This is justied since the elicitation method applied explicitly indicated that respondents
could answer any value listed on the payment card, or any other value they preferred. For this reason a standard Tobit model
is employed instead of an interval Tobit model. Moreover, the payment card includes a bid larger than the highest amount
stated (>D 120), meaning that the WTP variable is not censored at the highest amount stated on the card. The panel model
is:

ynt = n + x nt + nt (8)

where nt N[0, 2 ], and n N[0, 2 ]. We observe ynt = ynt if y > 0, and ynt = 0 if
ynt 0. The random effects Tobit model
N  nt
maximizes the log-likelihood n=1
ln f (yn |Xn , , 2 , 2 ) with:
 
T  dnt  2
1 1 n
f (yn |Xn , , 2 , 2 ) = nt [1 nt ]
1dnt
exp dn (9)
 22 22
i=1

and nt = ((ynt n xnt )/ ), = (( + x )/ ), where (.) and (.) denote the standard normal pdf and cdf,
nt n nt
respectively.
Appendix C gives a detailed explanation of the variables and their descriptive statistics. Different methods of coding
categorical variables have been applied. Continuous variables are created from categorical variables that represent monetary
classes, such as income, and the value of the house and contents (e.g. Blumenschein et al., 2008). Ordinal qualitative variables,9
which are partitioned into J intervals, can be included using J-1 dummies or can be transformed into values on the real axis
using an approach proposed by Terza (1986). An advantage of dummy coding is that the interpretation of the coefcients is
straightforward, but many variables are needed if J is large. In this case, the transformation of Terza (1986) can result in gains
in efciency and less estimation bias. For this reason, the latter approach has been applied in several studies (e.g. Praag van
et al., 2003). We apply dummy coding for variables with a small number of categories: namely, the rating of the ood risk
compared with that of an average resident, the effect of climate change on the ood probability, and the education level. The
Terza transformation (see Appendix D) is used for variables with a large number of categories: namely, the risk of suffering
ood damage, and the risk-seeking index.

5.5. Estimation results of the panel Tobit model

5.5.1. Scenarios of ood probabilities, risk ladders, and availability of government relief
Table 2 shows the coefcients, standard errors and t-statistics of the panel Tobit model (8) and the marginal effects of a
change in the explanatory variables on the (ln) WTP. The probability variable is in natural logarithm, which implies that the
marginal effect has an elasticity interpretation. The WTP is signicantly and positively related to the ood probability stated
in the survey. The marginal effect of the ood probability stated in the survey is less than proportional; it is approximately
0.11 in versions without risk ladders, and 0.16 in versions with risk ladders (computed as 0.11 + 0.05). An elasticity of 0.16
implies that the WTP for ood insurance increases with 0.16% if the ood probability stated in the survey increases with 1%.
In other words, a scenario of a doubling of the ood probability would increase WTP with only 16%, which means that the
increase in demand would be insufcient to keep up with the increasing cost of insurance.
The risk ladders have a large and statistically signicant (at the 1% level) effect on the sensitivity of the WTP to changes
in the ood probability stated in the questionnaire. The sensitivity to probability, which is a measure of sensitivity to scope

9
These are characterized by a continuous unobservable ordinal latent index, while each interval is ranked (1 through J) in increasing order according to
its supremum (Terza, 1986).
158 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

Table 2
Estimation results of a random effects Tobit model of ln(WTP).

Variable Coefcient Standard error t-Statistic Marginal effect

Scenarios in the survey

Log probability 0.5025*** 0.0736 6.83 0.1100
Log probability risk ladder 0.2460*** 0.0961 2.56 0.0538
Risk ladder 2.0878*** 0.6286 3.32 0.4570
Government compensation 0.1788*** 0.0648 2.76 0.0391
Risk perception
Climate change causes higher ood risk 0.9448*** 0.0794 11.90 0.2068
Risk of suffering ood damage 0.4195*** 0.0392 10.70 0.0918
Lower ood risk than the average resident 1.1128*** 0.0780 14.26 0.2436
Zero expected ood damage 0.9069*** 0.2174 4.18 0.4085
Log expected ood damage 0.0509*** 0.0109 4.68 0.0111
Zero expected return period ood 1.8662*** 0.3735 5.00 0.1985
Log expected return period ood 0.0747*** 0.0161 4.64 0.0163
Flooding is exogenous to human control 0.3594*** 0.0673 5.34 0.0787
Experience of ooding and evacuation 0.1197 0.1158 1.03 0.0262
Individual risk aversion
Insurance purchase index 0.2691*** 0.0904 2.98 0.0589
Risk-seeking index 0.4817*** 0.0355 13.54 0.1055
Geographical characteristics
Elevation of house relative to water level 0.0004*** 0.0008 5.38 0.00009
Area is not protected by dikes 0.4873*** 0.1162 4.19 0.1067
Distance of house to main river 0.0082*** 0.0030 2.76 0.0017
Rural area 0.7420*** 0.1572 4.72 0.1624
Socio-economic characteristics
Female 1.0866*** 0.0775 14.01 0.2379
Age 0.0089*** 0.0031 2.83 0.0020
Log value of property 0.2228*** 0.1000 2.23 0.0488
University degree 0.1597* 0.0856 1.86 0.0350
Log income 0.7768*** 0.0922 8.43 0.1701

Constant 0.3627 1.2364 0.29

v 0.8604 0.0135
u 2.1750 0.0532
Number of observations 2645
Log likelihood 2294
Restricted log likelihood 2987

Estimations are performed with Limdep software.

*
Signicance at the 10% level.
***
Signicance at the 1% level.

in this survey, increases by about 45% in the versions where ood risk is communicated with risk ladders.10 In addition, the
risk ladders increase the level of the WTP considerably, independent of the change in the ood probability, as indicated by
the positive and signicant coefcient of the dummy variable representing versions with risk ladders. The level of the WTP is
about 46% higher when risk ladders are shown to communicate risks. This is consistent with ndings of a survey by Wakker
et al. (2007) who nd that providing individuals with information on health costs and probabilities thereof increases their
demand for health insurance.
Examining the individual WTP responses reveals that in the version with (without) the risk ladder and without gov-
ernment relief 29% (30%) of these increase less than proportionally, while about 4% (7%) of them increase approximately
proportionally and only 1% (1%) increase more than proportionally with an increase in the probability stated in the survey
from 1 in 1250 to 1 in 600. About 57% of individuals neglect the risk and 10% show a WTP increase from a zero to a positive
amount. These responses to probability changes are very similar for the scenario of an increase in the ood probability to
1 in 400.11 In summary, few individuals adjust their WTP proportionally or more than proportionally to the changes in the
ood probability mentioned in the survey. This is in accordance with several other studies, suggesting that individuals are
insufciently sensitive to probability changes (e.g. Tversky and Wakker, 1995). This behaviour may be consistent with prob-
ability weighting functions of rank dependent and prospect theories (Quiggin, 1982; Tversky and Kahneman, 1992), while
it contradicts the linear processing of probabilities assumed in expected utility theory (Neumann von and Morgenstern,
1947). Overall, communicating the risk with risk ladders has a large effect on the sensitivity of individual WTP adjustments
to probability changes, as well as on the level of the WTP. Nevertheless, the effect of probability changes on the WTP remains
less than proportional even when risk ladders are shown to communicate ood risk.

10
Computed as (0.16 0.11)/0.11 100.
11
In the version without (with) the risk ladder and without government relief 36% (33%) of individual WTP values increases less than proportional, 2%
(4%) increases approximately proportional and 6% (5%) increases more than proportional to the probability change from 1 in 600 to 1 in 400. Probability
neglect is 50% (55%) and 7% (3%) of WTP values change from a zero to a positive amount.
 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166 159

The variable representing the Versions 1 and 2 describing the scenarios where compensation of ood damage by the
government may be granted has a negative and signicant coefcient. This implies that demand for ood insurance is lower
if individuals expect that the government may compensate ood damage than when such compensation is not available and
damage can only be reimbursed by insurance. The size of the marginal effect shows that the WTP is approximately 4% less
due to the current government compensation scheme.

5.5.2. Perceptions of ood risk and ood experience

The variables that represent respondents perceptions of ood risk are all highly statistically signicant. The higher indi-
viduals perceive their ood risk, the greater is their demand for ood insurance. These results suggest that individuals follow
an updating process of the ood probability, since prior perceptions of the ood probability are a signicant determinant of
their WTP, in addition to the ood probabilities stated in the questionnaire. In particular, if respondents think that climate
change increases ood risks, then their WTP is 21% higher. The WTP is positively related to the expected probability that the
household suffers damage from ooding, as the positive coefcient of the risk of suffering ood damage variable indicates.
Moreover, demand for ood insurance is 25% less if respondents rate their ood risk as lower than the national average
compared with respondents who rate their ood risk as being equal to, or higher than, average.
The expected ood damage is included as two variables; a dummy variable that captures the respondents who answered
a zero expected ood damage and a continuous variable of the expected ood damage of respondents with positive answers
in logarithmic form. The WTP is 41% smaller if the respondent expects to suffer no damage during oods, and it is higher, the
greater the respondent expects ood damage will be.12 The expected return period represents the ood risk on a quantitative
scale and is included in a similar way, using a separate variable that represents the zero answers. The WTP is 20% lower for
respondents who expect a zero return period of ooding, and decreases the longer the expected return period for respondents
who indicate a non-zero return period.
Respondents who indicate causes of ooding that are beyond their or the relevant water managers direct control, such as
extreme weather events or climate change, have a lower WTP value. This is consistent with studies showing that individuals
have lower ood risk perceptions if they regard oods as natural phenomena or exogenous to human control (e.g. Brilly and
Polic, 2005). Research in the USA suggests that demand for ood insurance is positively related to experience with ooding
(Krantz and Kunreuther, 2007; Michel-Kerjan and Kousky, 2010). However, the experience with ooding and evacuation
does not have a signicant inuence on WTP for ood insurance in this study.
The answers to the questions on ood risk perceptions, and the statistical analysis of their determinants are discussed
in detail in Botzen et al. (2009b), who do not address households demand for ood insurance as examined here. Given the
important inuence of ood risk perceptions on the WTP for ood insurance, it is useful to provide some insight into their
determinants (for more details see Botzen et al., 2009b). The statistical results of the models of the factors of inuence on
ood risk perceptions (not reported here) provide four main conclusions. First, actual exposure to ood risk partly determines
risk perceptions, since ood risk perceptions are higher for individuals who live in the vicinity of a main river or in low-lying
areas. In contrast, individuals in ood-prone areas that are unprotected by dikes tend to underestimate their ood risk.
Second, individuals who have experienced ooding and evacuation, but hardly suffered any ood damage, have a higher
perception of the ood probability but expect lower ood damage. Third, individuals with little knowledge of ooding have
lower risk perceptions. Fourth, there is mixed evidence on the inuence of socio-economic characteristics of the respondent
on ood risk perceptions.

5.5.3. Individual risk aversion

Two variables are included in the model of the respondents risk attitudes. The insurance purchase index represents
individuals who have purchased many other insurance policies and is an indicator of revealed risk attitudes. The positive
and signicant coefcient of this variable indicates that such individuals also have a higher demand for ood insurance.
In addition, a variable has been included that represents risk attitudes as stated by the respondents themselves. This risk-
seeking index has been derived from answers to a question in which respondents indicated how similar they regarded
themselves to a person who avoids taking nancial risks and prefers to be well-insured. The negative coefcient of this
variable indicates that the more risk-seeking individuals have a lower WTP for ood insurance. These relations between risk
attitudes and insurance demand are consistent with ndings of Wakker et al. (2007).

5.5.4. Geographical characteristics

Geographical characteristics are included as explanatory variables since they serve as indicators of the actual ood risk.
These objective measures of risk may inuence WTP in addition to perceptions of risk. Data for these variables (on the

12
It may be expected that individuals who have zero expected ood damage have a zero WTP for ood insurance. However, this need not be the case in
our application where two of the three contingent valuation questions elicit the WTP for ood insurance in situations where ood probabilities increase
due to climate change. Individuals with a zero expected ood damage under current climate conditions may have a positive WTP value in the climate
change scenarios if they expect to suffer ood damage when climate change increases peak ows of rivers and potential ood levels.
160 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

respondents zip code area level) have been obtained using Geographical Information Systems (GIS) maps.13 A variable
has been constructed that represents the difference between the elevation of the zip code area of the individual and the
height of the potential water level of a ood.14 The results show that the WTP is negatively related to the elevation of
the respondents living area relative to the potential water level. Some respondents live in ood-prone areas that are not
protected by primary river dikes, which implies that they face a considerable larger probability of ooding. It is examined
whether respondents who live in ood-prone areas unprotected by dikes have a larger demand for ood insurance. A variable
representing such respondents is statistically signicant and negative. The marginal effect indicates that the WTP for ood
insurance is 11% lower in these high-risk areas. An explanation of the lower WTP in unprotected areas may be that such
individuals are unaware of the high risk they face or that these individuals are more used to the natural ow of the river
and, therefore, do not feel unsafe and have a lower fear for ooding than inhabitants of protected (but often very low-lying)
polder areas (Baan and Klijn, 2004). Statistical analyses of the factors of inuence on risk perceptions have shown that
inhabitants of unprotected areas have lower perceptions of ood risk than inhabitants in protected areas (Botzen et al.,
2009b).
Homeowners who live close to main rivers are more likely to suffer ood damage, for example, due to higher ow
velocities of water and because they tend to be closer to where the water can reach during a ood. Moreover, homeowners
who live close to a river may be more willing to buy ood insurance because the ood risk is more salient to them since they
regularly see the river. The effect of living close to a river on the WTP is examined by including a variable that represents
the distance of the respondents house to the closest main river. The coefcient of this variable is signicant and negative,
so that homeowners who live further away from a main river have a lower ood insurance demand than homeowners who
live close to a river. Finally, it is examined whether inhabitants of rural areas place a different value on ood insurance
than inhabitants of cities. The marginal effect indicates that inhabitants of rural areas have a 16% higher WTP for ood
insurance.
These ndings about the inuence of geographical characteristics on insurance demand are very relevant for insurers.
It has sometimes been suggested by Dutch insurers that problems with adverse selection may be severe in ood insurance
markets, in case it is only those individuals who live in unprotected areas with high ood risks who would demand ood
insurance (de Vries, 1998). Our ndings indicate that the problem of adverse selection may be minor, because the WTP may
actually be lower for some homeowners in these high-risk areas.

5.5.5. Socio-economic characteristics

The socio-economic variables indicate that being female decreases the WTP by approximately 24%. Although some studies
nd no effect of gender on risk attitudes (e.g. Harrison et al., 2007), our result is in contrast with ndings of most of the
literature on gender differences in risk preferences as is reviewed by Croson and Gneezy (2009), who conclude on the basis
of 10 studies that men are more risk seeking than women. However, these authors highlight that a notable exception to
this general nding is a paper by Schubert et al. (1999), who nd that men are more risk averse than women if lotteries are
framed as losses rather than gains. Our insurance application is more similar to a lottery involving losses than gains and
nds similar gender differences in risk attitudes, which suggests that the main observation of Croson and Gneezy (2009)
that men are more risk seeking does not hold in all settings.
Age inuences demand for ood insurance negatively. This is in contrast with existing empirical studies that nd that
risk aversion increases with age (e.g. Dohmen et al., 2011). The positive relation between risk aversion and age is rooted in
portfolio risk aversion theory which predicts that people become more risk averse as they age and tend to switch to safer
assets as they near retirement (Edwards, 2010). Our results about demand for ood insurance in the Netherlands are not in
line with this prediction.
Having a university degree decreases the WTP slightly, but, this effect is only signicant at the 10% level. Adverse selec-
tion may still be an issue if homeowners with an expensive house and home contents have a higher demand for ood
insurance, since these homeowners are more likely to suffer high ood damage. We examine this by including a variable of
the logarithm of the total value of the respondents property, i.e. house and contents, which is also an indicator of wealth.
Ganderton et al. (2000) explain that the effect of higher wealth on the demand for insurance is in theory ambiguous. On
the one hand, insurance costs are a smaller fraction of an individuals wealth for richer individuals while they may be more
likely to suffer high property damage, which would increase their insurance demand. On the other hand, potential losses
may be more easily carried by wealthy people which makes insurance less attractive and increases self-insurance. The latter
effect seems to dominate in our study since the total value of property has a negative inuence on the WTP for ood insur-
ance. The net income level of households positively inuences WTP for ood insurance. The estimated income elasticity is
0.17.

13
These data are based on zip code numbers and letters for 950 respondents, which is highly accurate because the GIS data are available on street level.
The data for 32 respondents are based on zip code numbers only because letters were incomplete.
14
Adjustments have been made for respondents who live in ats on the rst oor by adding 2.5 m to the height of the area.
 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166 161

6. Conclusions

This study has examined the demand for ood insurance using a survey of a large sample of homeowners living
in the river delta area of the Netherlands. The results indicate that a large proportion of homeowners neglect the low
probability of ooding and do not want to purchase ood insurance. This behaviour contradicts expected utility the-
ory and may be explained by prospect theory. The mean WTP value of homeowners who are interested in buying ood
insurance (dened as CWTP) is above the average expected value of the ood damage per household. Fewer homeown-
ers neglect the risk under a scenario stated in the survey of increased ood probabilities as a result of climate change.
The results indicate that the current ex post public compensation scheme of ood damage lowers demand for private
insurance.
A panel Tobit model has been employed to estimate the factors of inuence on the WTP for ood insurance. Fear for
adverse selection in ood insurance seems unfounded, as the geographical characteristics of the respondents show that the
inhabitants of areas more vulnerable to ooding do not necessarily have a greater demand for insurance than the inhabitants
of less vulnerable areas. In fact, the results indicate that inhabitants of unprotected areas even have a lower WTP for ood
insurance. These results imply that ood insurance can be targeted to inhabitants of areas that are protected against ooding,
since these individuals seem to realize that ood prevention infrastructure cannot guarantee a complete protection. The
relations between the WTP and other geographical characteristics that indicate ood risk are as expected; the WTP for ood
insurance is higher for households who live close to a river and in low-lying areas. Moreover, the positive relations between
the WTP and indicators of individual risk aversion are consistent with expectations, which provide some validation for the
valuation survey.
During pre-tests of the survey, respondents indicated that the risk ladders were useful in increasing their understanding
of the ood probability faced. Therefore, it was decided to include risk ladders in the nal survey as this would allow
respondents to make a more rational insurance purchase decision. Using risk ladders as device to communicate the ood
probability considerably increases the sensitivity of the WTP to probability changes. The effect of the risk ladder on the WTP,
irrespective, of probability is also to increase the WTP by a large amount. In other words, the way low-probability risks are
communicated has a large impact on the outcomes of the valuation task. This nding can be of practical use for governments
or insurance managers who aim to increase demand for ood insurance.
Furthermore, the results of the Tobit model show that the WTP for ood insurance is less than proportionally related
to scenarios of increased ood probabilities that were stated to respondents in the questionnaire. Perceptions of ood
risk play a more important role in the demand for ood insurance. In particular, the greater the respondents perceive
their ood risk to be, the higher is their WTP value. Several measures of prior risk are statistically signicant in explain-
ing the WTP, that is, in addition to the ood probability stated in the questionnaire. This suggests that it is difcult to
capture the complete effect of an increase in the ood probability on the WTP for insurance by focusing only on the
effect of probabilities stated in surveys. A gradual increase in ood risk due to climate change may increase risk per-
ceptions, which in turn can increase demand for ood insurance, so that the nal effect may not be entirely captured
by the coefcient of the ood probabilities. Another important implication of our ndings is that increasing awareness
of the ood risk may increase demand for insurance. Future research could focus on examining the updating of prior
beliefs in responses to changes in risk due to climate conditions and the corresponding effects on insurance demand,
as well as on the effectiveness of ood risk awareness campaigns in inuencing individual risk beliefs and insurance
decisions.

Acknowledgements

We thank Jeroen Aerts, Joop de Boer, Marija Bockarjova, Laurens Bouwer, Roy Brouwer, Sebastiaan Hess, Vincent
Linderhof, George Loewenstein, Marije Schaafsma, and colleagues at the Institute for Environmental Studies (IVM) for
suggestions and comments on the questionnaires. Alfred Wagtendonk helped in preparing the GIS data. We are grateful
to Ada Ferrer-i-Carbonell and Anna Alberini for helpful discussions and suggestions regarding the econometric analysis.
Peter Wakker and three anonymous referees provided useful comments on the paper. This research was carried out in
the context of the Dutch National Research Programme Climate Changes Spatial Planning (www.klimaatvoorruimte.nl),
and has been funded by a Veni grant of the Netherlands Organisation for Scientic Research (NWO). The usual disclaimer
applies.

Appendix A. Determination of risk using a risk ladder

The linear15 risk ladders depict the probability of car-theft, re in a residential building, ooding, car-re and the risk of
a fatal trafc accident. The probability of a deadly trafc accident is the probability that a trafc participant dies because of
an accident and is obtained from RVWS and VROM (2003). The information on the other probabilities is obtained from the
Verbond van Verzekeraars (Union of Insurers) (2005, 2006, 2007) and the Central Bureau of Statistics (CBS, 2005, 2006,

15
The risk ladder has a scale that increases by 2/4000 per step, implying a linear scale (e.g. Vassanadumromgdee and Matsuoka, 2005).
162 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

High Risk
1 in 350

1 in 400 The probability of theft of your car is 1 in 450.

This means that per year 1 out of 450 cars gets
Car theft stolen.
1/450

1 in 500 The probability of fire in your house is 1 in 950.

This means that per year 1 out of 950 houses
catch fire.

1 in 650
The probability of flooding is 1 in 1250.
This means that a flood event happens 1
Fire in house time per 1250 years.
1/950
1 in 1000
Flood The probability of fire in your car is
1/1250 1 in 1650. This means that per year 1
out of 1650 cars catch fire.
Fire in car
1/1650
1 in 2000
The probability that you die as a result of a
traffic accident is 1 in 4000. This means that
per year 1 out of 4000 traffic participants die.
Traffic casualty
1/4000
1 in 4000
Low Risk

Fig. A.1. Risk ladder that compares the current ood probability with other risks.

2007). The probabilities are based on 5-year averages between 2002 and 2006 and computed as the number of times an
event (car re, car theft, re in a house) occurs per year divided by the number of private cars or residential houses, as
explained in Botzen et al. (2008) (Fig. A.1).

Appendix B. Payment card

See Fig. B.1.

0 2 4 8 15 30 65 120
1.25 2.50 5 10 20 40 80 More than 120
1.50 3 6 13 25 50 100 Dont know

Fig. B.1. The payment card included with the contingent valuation questions.

Appendix C. Explanatory variables and descriptive statistics

See Tables C.1 and C.2 .

Table C.1
Summary overview of the variables used in the statistical analysis.

Climate change causes higher ood risk Dummy variable, 1 = respondent expects that climate change causes
higher ood risks
Risk of suffering ood damage Categorical variable (range 111), 1 = no risk and 11 = extremely high risk
Lower ood risk than average resident Dummy variable, 1 = respondent expects that his/her ood risk is lower
than that of an average resident in the Netherlands
Zero expected ood damage Dummy variable, 1 = respondent does not expect to suffer ood damage
during a ood
Expected ood damage Continuous variable, damage in euros
Zero expected return period Dummy variable, 1 = respondent expects return period to be zero
Expected return period ood Continuous variable, return period in years
 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166 163

Table C.1 (Continued )

Flooding is exogenous to human control Dummy variable, 1 = respondent mentions only climate or natural
conditions and not human or water management as causes of ooding
Experience with oods and evacuation Dummy variable, 1 = respondent has experienced a ood and has been
evacuated in the past
Insurance purchase index Dummy variable, 1 = respondent has purchased more than 8 of the
following insurances: health insurance with no deductible, home, home
contents, dentist, continuous travel, all-risk car, life, bike, legal assistance,
and disability insurance
Risk-seeking index Categorical variable (range 15), 1 = very risk averse, 5 = not risk averse at
all
Elevation of house relative to water level Continuous variable, elevation of the living area relative to the potential
water level of a ood in centimetre
Area is unprotected by dikes Dummy variable, 1 = the area is not protected by dikes
Distance of house to main river Continuous variable, distance of the respondents house to a main river in
kilometres
Rural area Dummy variable, 1 = the area is a rural area
Female Dummy variable, 1 = respondent is female
Age Continuous variable, age in years
Value of propertya Continuous variable, total market value of the house contents of the
respondent in D
University degree Dummy variable, 1 = highest degree is university education
Incomeb Continuous variable of the monthly after-tax household income in D
a
For housing value the respondent could mark one of the following categories: <D 100,000; D 100,000D 150,000; D 150,000D 200,000;
D 200,000D 250,000; D 250,000D 300,000; D 300,000D 350,000; D 350,000D 400,000; D 400,000D 500,000; D 500,000D 600,000; >D 600,000. For
home contents values the respondent could mark one of the following categories: <D 25,000; D 25,000D 50,000; D 50,000D 75,000; D 75,000D 100,000;
D 100,000D 125,000; D 125,000D 150,000; D 150,000D 175,000; D 175,000D 200,000; D 200,000D 300,000; >D 300,000. Continuous value of housing
and home contents variables were constructed by setting the housing and home contents value of each respondent to the midpoint of the interval (D 650,000
and D 350,000 were used for respectively the highest housing and home contents value categories).
b
For income the respondent could mark one of the following categories: <D 750; D 751D 1000; D 1001D 1250; D 1251D 1500; D 1501D 2000;
D 2001D 2500; D 2501D 3000; D 3001D 3500; D 3501D 4000; >D 4000. A continuous income variable was constructed by setting the income of each
respondent to the midpoint of the interval (D 4500 was used for the highest category).

Table C.2
Descriptive statistics of the explanatory variables.

Variable N. Obs. Mean Std. Dev.

Climate change causes higher ood risk 982 0.65 0.48

Risk of suffering ood damagea 982 4.19 2.20
Lower ood risk than average resident 982 0.48 0.50
Zero expected ood damage 981 0.12 0.33
Expected ood damage 981 70,383 185,400
Zero expected return period 982 0.04 0.19
Expected return period ood 982 113,780 3,190,695
Flooding is exogenous to human control 982 0.39 0.49
Experience of oods and evacuation 982 0.03 0.17
Insurance purchase index 982 0.12 0.33
Risk-seeking indexa 982 3.24 1.16
Elevation of house relative to water level 982 620 1165
Area is unprotected by dikes 982 0.11 0.32
Distance of house to main river 982 9.40 11.68
Rural area 982 0.05 0.222
Female 982 0.42 0.49
Age 982 45.59 11.95
Value of property 982 411,947 167,669
University degree 982 0.21 0.41
Income 982 2856 1018
a
The statistics of this variable are in accordance with the coding in Table C.1. This original coding has been transformed for the analysis according to Terza
(1986), as described in Appendix D.

Appendix D. Terza transformation

Terza (1986) proposes to transform ordinal qualitative variables with J classes as follows:

(n(j1 ) n(j ))
j = (D1)
(N(j ) N(j1 ))
164 W.J.W. Botzen, J.C.J.M. van den Bergh / Journal of Economic Behavior & Organization 82 (2012) 151166

where n and N are the pdf and cdf of the standard normal distribution, respectively, and

1 = N 1 (p1 )
2 = N 1 (p1 + p2 )

J1 = N 1 (p1 + p2 + pJ1 )

and pj is the percentage of the sample observed in category J.For the lowest category, Eq. (D1) reduces to:

n(j )
j = (D2)
N(j )

For the highest category the Eq. (D1) is:

n(j1 )
j = (D3)
(1 N(j1 ))

Appendix E. Supplementary data

Supplementary data associated with this article can be found, in the online version, at doi:10.1016/j.jebo.2012.01.005.

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