One of the core threats of climate change are increasing flood events in severity and frequency (Hirabayashi et al. 2013; IPCC, 2012). The main private adaptation measure to cope with possible damages from such events is insurance. However, private insurance protection is low (Kunreuther 1984; Schwarze et al. 2011). One factor underinsurance can be attributed to is the individuals’ expectation of governmental relief or charitable aid in case of a damage. This reliance on others’ support and not sufficiently undertake own measures is called ‘charity hazard’ (see e.g. Andor et al. 2017; Browne & Hoyt 2000).

We analyse how participants’ insurance decision is influenced by different compensation schemes and damage experience experimentally. Specifically, we test the ‘charity hazard’ of the two compensation schemes: (i) certain partial compensation which is in place in Austria and (ii) uncertain total compensation which reflects the German strategy. Furthermore, the experience of a damage might influence the subsequent insurance decision depending on the number of events and the discounting of the experienced effects. We conducted an incentivised experiment and have three main contributions to the literature: Firstly, we compare compensation schemes mirroring actual policies in Germany and Austria. Secondly, we provide to the best of our knowledge the first experimental analysis of charity hazard in insurance markets with monetary incentives. Thirdly, we run the experiment with student subjects as well as subjects facing real flood risks.

In our experiment subjects were randomly assigned to either one of the compensation schemes (i) certain partial compensation or (ii) uncertain total compensation. Each participant need to make a personal insurance decision (yes/no) in ten consecutive rounds. We run the experiment in the mLab at the University of Mannheim in October 2018 with 127 subjects. Additionally, we run the same experiment online with 47 participants from the city Dornbirn (Austria) living in flood prone districts in December 2018.

First results show that individuals respond to the different compensation schemes depending on their risk attitude. Controlling for previous experience of a damage within the experiment reveals that only slight differences in participants insurance decisions. Furthermore, on average the student subject pool and the population of Dornbirn are not significantly different reacting to neither the compensation scheme nor the experience of events in their insurance decision.