According to Kenneth Arrow people do not prefer :
Flood insurance
Kenneth Arrow, in his 1982 article on risk perception in psychology and the study of markets, discussed evidence that people's insurance choices depart from the predictions of expected utility theory. He drew on the field study by Howard Kunreuther and co-authors (1978) on disaster insurance in the United States.
That study found that households living in flood-prone areas did not buy flood insurance even when it was heavily subsidised and priced well below its actuarial value. People tend to ignore low-probability, high-loss events, so they fail to insure against floods although a rational risk-averse individual would do so. Arrow used this as a leading example of how risk is misperceived.
Flight insurance shows the opposite pattern: travellers often over-pay for it relative to the tiny risk, because the risk is vivid at the moment of purchase. Property insurance and life insurance are widely bought and were not the examples of neglected cover in Arrow's discussion.
Flood insurance option is correct.
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