Behavioural Actuarial Science: Policyholder Decision-Making Biases and Insurance Market Efficiency in Nigeria

This study develops a behavioural actuarial science framework for analyzing policyholder decision-making biases and their aggregate implications for insurance market efficiency in Nigeria. Classical actuarial and insurance economics theory models policyholders as rational expected utility maximizers whose demand for insurance follows predictable functions of premium, coverage, and risk probability. A growing body of experimental and behavioral economics evidence challenges this rationality assumption, identifying systematic biases including probability neglect, loss aversion, present bias, and ambiguity aversion that distort insurance demand in ways that both limit market size and create actuarial pricing anomalies. This study combines experimental economics methods with actuarial analysis to measure policyholder biases in the Nigerian insurance market. Field experiments involving 480 participants across Ibadan, Kano, and Port Harcourt measure stated and revealed insurance preferences under controlled variation of probability, premium, and coverage parameters. Bias measures are incorporated into a modified actuarial demand model whose aggregate market implications are simulated. Findings confirm significant probability neglect for low-probability high-severity risks and strong present bias in premium payment decisions among Nigerian respondents, consistent with patterns documented in other low-income markets but with distinctive cultural modulations around communal risk sharing preferences. The study contributes an original behavioural actuarial demand model calibrated for Nigeria and recommends that NAICOM permit flexible premium payment structures to accommodate present bias without reducing coverage adequacy.

Keywords: behavioural actuarial science, policyholder behaviour, insurance demand, present bias, Nigeria.