Insurance premiums soar for ambiguous contracts, hindering transactions and profits.
Insurance companies charge higher premiums for contracts with uncertain events like hurricanes or terrorist attacks. This can make it harder for people to buy insurance. A study looked at how uncertainty affects the amount of money insurance companies need to have on hand to stay in business. They found that more uncertain contracts require insurance companies to hold more money. This means that ambiguous insurance contracts cost more because of the extra uncertainty involved.