Consumers’ Insurance Choices
Natalie Wang
Claire Matthews*
School of Economics and Finance
Massey University
Private Bag 11-222, Palmerston North, New Zealand 4442
Ph +64 6 3569099 Extn 2329
* Corresponding author
Version: September 2011
Abstract
Key words: Insurance choices, Consumer behaviour, New Zealand
JEL Codes: D12, D14, G22
Concerns have been expressed that New Zealanders do not have adequate life insurance[1], with claims that the level of underinsurance in New Zealand (and Australia) is such that it is becoming a major social policy issue (Anonymous, 2005). Data from the OECD shows that in 2008, the most recent data available, New Zealand had the third lowest penetration of insurance among 31 OECD countries, with only Greece and Mexico having a lower penetration[2] (OECD, 2011). As explained by Vos (1996), insurance is used as part of the process of managing financial risk, and insufficient insurance means there is insufficient protection against adverse financial events. Research in Australia has quantified the underinsurance problem there at AUD$1.37trillion (ISI, 2010), but similar data for New Zealand is not available at this stage.
New Zealand has 41 life insurance companies operating (Ministry of Economic Development, 2010), comprising both locally incorporated companies and branches of international companies. These companies offer a range of life insurance products, some of which are targeted to specific sectors of the market such as the over-55s, and with the specific policy details varying between products.
The origin of life insurance was as a means to offer compensation for a person’s premature death. However, life insurance has broadened its application beyond the traditional death cover to now incorporate health related and other risks. The two broad categories of life insurance are death cover, which incorporates all life insurance policies that make a payment to the policyholder on the death of the person insured, and living cover, which comprises life insurance policies that make a payment while the insured person is still alive. Table 1 provides a list of the types of life insurance cover with a brief definition of each, and identifies into which of these two broad categories each fits.
Death Covers provide a lump sum payment in the event ofAccidental Death Cover / the death of the insured person[3]by accident(as defined in the policy[4])
Death Cover / the death of the insured person (from any cause)
Funeral Cover / the death of the insured person, which is designed specifically to assist with the funeral costs (small lump sum)
Living Coversprovide a payment in the event of
Lump sum payment / Trauma/critical illness (also called living) cover / the insured person suffering a serious illness or accident as defined in the policy, such as cancer or heart attack
Total Permanent Disability Cover / the insured person becoming completely and permanently disabled (as defined in the policy)
Regular (monthly) payment / Income Cover / the insured person being unable to work because of a disability (the payment is based on his/her annual salary)
Mortgage Repayment Cover / the insured person being unable to work for reasons specified in the policy – the payments cover the cost of the mortgage (based on theusualrepayments)
Redundancy Cover / the insured personbecoming unemployed or beingmade redundant
Medical Cover / major medical expenses, with expenses being reimbursed
Table 1: Types of life insurance cover
In New Zealand there were 27,819 deaths of adults (20 years or older) in 2010[5], while in 2008 there were20,317 diagnoses of cancer and 8566 deaths from cancer (an increase of 13% since 1998)[6]. A 2006/2007 health survey found that 89,400 people had suffered a heart attack requiring hospitalisation at some stage, and 57,700 adults had experienced a stroke[7]. For the people involved, the consequences of inadequate, or non-existent, insurance may include:
- Those left behind following a death being unable to manage financially and they may require the use of social welfare services provided by government, or may simply have to live at a lower socio-economic level than previously
- Those providing funeral services may be left out with unpaid debts
- A heart attack may leave someone unable to work and unable to support themselves and their family
- The loss of the family home due to an inability to meet the regular payments required
Calculation of an appropriate level of insurance for an individual’s situation is possible (see for example Naylor, 2010), but it is not an exact science. However, taking out an insurance policy has an emotional element, and requires the contemplation of one’s death or experience of extreme health issues, which is not easy for some people, particularly the former. It also requires a level of financial literacy in order to understand the decision-making process and the consequences of the decisions made. Financial advisers who assist with these decisions have many stories of the difference the existence (or lack) of insurance has made to individuals faced with a death or critical illness.
There is limited understanding of the extent of the underinsurance issue in New Zealand and how consumers determine the appropriate level of insurance to hold. This study provides an initial exploration of these questions. The next section looks at prior research on consumer life insurance decisions. This is followed by an overview of the methodology of this study, before the results are presented. The final section concludes.
Prior Research
People are increasingly looking to plan and secure their financial future, and one element of personal financial planning is minimising the financial risks that one faces. Vos (1996) notes that not planning requires a decision to be made, as inadequate insurance (and not having a will etc) has consequences. Risk describes a situation where there is uncertainty about the outcome, and even the short-term future can be highly uncertain (Harrington & Niehaus, 2004, and Diacon & Watkins, 1995). Sometimes the risk has a known probability, such as the likelihood of having a heart attack being linked to family history and lifestyle.
Harrington & Niehaus (2004) identify six risks faced by consumers, being earning risk, which is unpredicted changes to household income due to the earner’s inability to maintain his/her income level; medical expense riskand liability risk, which are related to uncertain large expenses that may occur over a person’s life; physical risk and financial risk, which are risk of loss on physical or financial assets; and, longevity risk, which is the risk that a person outlives their financial resources. These risks can be summarised as people risk, which is associated with health issues and reduced ability to earn income, and assets risk, which is the loss of value in one’s assets. This study is concerned solely with people risk.
Vos (1996) explains that the purpose of insurance cover is to help in managing financial risk, by sharing the risk of loss or disability with others. Insurance represents an economic device that allows an individual to substitute a small certain cost (the premium) for a large uncertain financial loss that might occur. Life insurance specifically provides protection against the risks of disability and premature death (Harrington & Niehaus, 2004).
Understanding consumers’ preferences and choices is important in order to be able to meet customer demand (AlinviBabri, 2007). The purchase of life insurance is an infrequent consumer activity, making it different to consumers’ regular purchases, and Vaughan & Vaughan (2001) argue that it also differs from the purchase of other insurance. Consumers will only purchase insurance voluntarily if it is demonstrated that the purchase will enhance their welfare, either by controlling risks or providing relevant financial services (Ennew, Watkins & Wright, 1995). Burnett & Palmer (1984) suggest that life insurance is a product associated with specific needs and personality traits, rather than a belief (or not) in life insurance. Their study finds that above average levels of life insurance are held by those who are self-sufficient and see themselves as being in control of their own well-being. Ferber and Lee’s (1980) study suggests the purchase of life insurance is influenced by home ownership, the husband’s education and the husband’s role as “family financial officer”.
There are cultural differences in attitudes and behaviours around life insurance. Zhou & Bankston (1998) report that “to be a Vietnamese, you must think of your family first” (p. 166). Similarly, Fuglini, Tseng &Lam (1999) describe Asian backgrounds as a collectivistic orientation that emphasises familymembers’ responsibility and obligations to one another. They report that in the US, youths from Asian and Latin American groups hold stronger values regarding respect and future obligations to their families than do those from European backgrounds.
Powell and Ansic’s (1997) study finds gender differences exist in financial risk preference, motivation, risk propensity and decision strategy. They claim these differences could affect choices and opportunities in domestic decisions, including the purchase of financial products.
Other factors that may affect insurance purchase decisions by consumers are societal. In particular, the existence of state funded care or cover may limit the actual or perceived need for insurance. In the US, all states have laws that govern employers’ responsibility for workplace injuries to employees[8]. However, the laws don’t cover all employees, with agricultural, domestic and causal employees commonly excluded (Vaughan & Vaughan, 2001). In Australia, the government provides Medicare, which is basic universal health insurance. The tax system encourages middle to high income earners to supplement this with private health insurance, by charging a Medicare Levy Surcharge of 1% on taxpayers earning more than $76,000 who do not have private health insurance – this surcharge is in addition to the standard 1.5% Medicare Levy paid by all taxpayers. Private health insurance provides greater choice and flexibility to consumers in relation to medical services. Since 1974, New Zealand has had the Accident Compensation Corporation that protects New Zealanders against the financial effects of all types of personal injury, irrespective of cause or fault. In addition, New Zealand employers commonly provide insurance benefits to their employees, including medical insurance, life insurance (death cover), disability insurance and retirement savings support (Harrington & Niehaus, 2004).
In the US, there is some support from the federal and state governments for wage earners who become unemployed for reasons that are involuntary and not related to misconduct[9]. This support is related to the individual’s income, but for a limited period of time (Vaughan & Vaughan, 2001). The limits associated with this mean that some private insurers offer supplemental unemployment insurance for a capped amount for a defined period. This contrasts with New Zealand, where the government provides a low, universal level of support for anyone unable to find employment provided they are actively seeking employment (Work & Income, 2011), and there is no maximum period for receiving this type of benefit. Supplemental insurance is available in New Zealand from private insurers in two forms. The first is income protection insurance that provides cover if the individual becomes unemployed, with the cover being provided for a set period, until the individual returns to work or until retirement depending upon the specific policy. The other form of insurance is loan repayment insurance that meets repayments on the insured loan, if the individual becomes unemployed or unable to work for medical reasons. Such policies have conditions, such as waiting periods, which affect their attractiveness to consumers and their cost.
Life insurance is a long-term commitment, but many policies are discontinued within the first two years suggesting an element of consumer regret. The effort put into obtaining the life insurance, such as completing medical checks, is effectively wasted, and a consumer may find it difficult to obtain insurance at a later date if their health changes. Churchill (2006) argues that insurers need to educate and provide adequate information about insurance as a pre-condition for having satisfied customers.
When purchasing life insurance, consumers rarely consult multiple advisers or compare costs (Johnston-O’Connor, O’Connor & Zultowski, 1984). Crosby & Stephens (1987) suggest the distribution of life insurance is about relationship marketing, and a good relationship between the customer and the agent can reduce cancellation of life insurance.
Methodology
This study used an online survey on the SurveyMonkey website to collect responses, with some respondents recruited via a direct email invitation, while others responded to a press release issued about the study. The online survey was useful for dealing with skip and other instructions within the questionnaire. The survey comprised 34 questions covering the type of insurance policies held, the companies that underwrote those policies, insurance review activities, factors that influence insurance decisions, and experience of insurance events. In addition, there were 10 questions asking about the respondents’ demographic characteristics. A total of 110 responses were received with 108 of those providing valid responses. The table below shows the demographic characteristics of the sample.
% / %Age / Under 20 / 0.0 / Ethnicity / New Zealander / 51.1
20-29 / 12.5 / European/Pakeha / 29.5
30-39 / 37.5 / Maori / 2.3
40-49 / 25.0 / Pacific Island / 1.1
50-59 / 14.8 / Chinese / 5.7
60-69 / 9.1 / Korean / 1.1
70+ / 1.1 / Japanese / 0.0
Indian / 3.4
Number of Children / 0 / 28.4 / Asian - others / 1.1
1 / 14.8 / Other countries / 4.5
2 / 35.2
3 / 14.8 / Marital Status / Single / 11.4
4 / 5.7 / De facto / 13.6
5 / 1.1 / Civil union / 0.0
Married / 67.0
Qualification / No qualification / 1.1 / Divorced / 4.5
Secondary school qualification / 16.7 / Widowed / 1.1
Vocational qualification / 20.0 / Don't want to disclose / 2.3
Bachelor degree / 32.2
Post graduate qualification / 30.0 / Employment Status / Self employed / 23.0
Full time employed / 69.0
Housing Situation / Owned without mortgage / 18.2 / Part time employed / 4.6
Owned with mortgage / 60.2 / Unemployed / 0.0
Rent / 15.9 / Student / 0.0
Other / 5.7 / Retired / 1.1
5 / Other / 2.3
Individual Income / Less than $20,000 / 0.0
(before tax) / $20,001 – $35,000 / 2.4 / Household Income / Less than $35,000 / 0.0
$35,001 – $50,000 / 14.1 / (before tax) / $35,001 – $50,000 / 4.7
$50,001 – $80,000 / 25.9 / $50,001 – $80,000 / 12.9
$80,001 – $100,000 / 16.5 / $80,001 – $100,000 / 10.6
$100,000 – $150,000 / 28.2 / $100,000 – $150,000 / 36.5
$150,001 or more / 12.9 / $150,001 or more / 35.3
Table 2: Sample demographic characteristics
As Table 2 shows the sample is strongly middle-aged, with 77% aged 30-59, and, given their likely life cycle stage, life insurance is likely to be more important for this group. The age distribution is also likelyto explain the proportion of the sample with children (72%), with an owned home with a mortgage (60%) and a partnered relationship (81%). Thesecharacteristics may indicate that the sample has a greater level of interest in insurance than average. The median individual income in the sample is in the $80,000-$100,000 bracket, well ahead of the New Zealand population median of $27,500[10] as at 30th June 2010. The median household income for the sample is higher, being in the $100,000-$150,000 bracket, compared to the average New Zealand household income of $76,584 as at 30th June 2010[11].
Results
Life insurance product choices
The first issue of interest is the extent of life insurance cover currently held, and respondents were presented with nine different types of life insurance and asked which they had. As Figure 1 shows, the most common form of life insurance held was medical insurance closely followed by standard death cover. The type of insurance that was least likely to be held was redundancy cover and mortgage repayment cover.
Figure 1: Proportion of respondents holding life insurance by type of cover
Not all respondents held insurance policies, but most held multiple policies. The largest group in the sample (24%) held five different types of life insurance, and a further 18% held four. A smaller proportion (13%) held six different policies, and the same proportion held just one policy. No insurance policy of any kind was held by the same proportion (13%). No-one reported holding all nine types of policies, but a small number reported holding seven (3%) or eight (4%).
In a later question, respondents were asked to indicate the relative importance of each of the different types of life insurance. Not unexpectedly, these results were in line with the extent of insurance holdings. The most important life insurance policy to have was death cover (mean importance of 1.5[12]), followed closely by medical insurance (1.7) then trauma (1.9) and income protection (1.9). The least important was funeral cover (3.2) then redundancy (3.0).
Cross-tabulations were undertaken to explore the demographic characteristics that may be related to the policies held, and the significant relations found are reported in Table 3 below. Age has the greatest influence, being related to the holding of four different types of policy, followed by ethnicity, which is related to the holding of three different types of policy. Of some surprise is the lack of relation between housing situation and mortgage repayment insurance, given this type of policy is only relevant for someone who owns their own home with a mortgage.
Age / Education / Marital status / Number of children / Household income / Individual income / Employment status / Housing situation / EthnicityAccidental death / 0.00
Death / 0.02 / 0.01 / 0.10 / 0.01 / 0.02 / 0.02
Funeral / 0.05 / 0.09
Trauma/Critical illness / 0.05
Total permanent disability / 0.02
Income / 0.06 / 0.10 / 0.04
Mortgage repayment / 0.00
Redundancy / 0.05 / 0.01
Medical / 0.03 / 0.02 / 0.00
Table 3: Significant relations between types of insurance cover held
and demographic characteristics (p-value for chi-square test)
Having established what policies the respondents hold, the next matter of interest is to understand the factors that influence their decisions on which type of insurance is appropriate and/or necessary. Respondents were asked how important twelve factors were in influencing their choice in respect of the policies they currently hold, and then how important the same factors would be if they were to take out a new life insurance policy today. As Figure 2 shows there is a strong similarity to the average importance attached to each factor whether it relates to the current policy or a possible future policy, with a lower number indicating a higher level of importance, which is not unexpected. The most important factor for current policies was Policy wording & coverage, followed by Mortgage/large debts. These were also the most important for taking out a new policy, but in the opposite order. However, in both cases the difference in the average rating was very small.