Under insurance

The studies and findings related to the underinsurance has been discussed before in recent years. It has been proved and showed in the articles, journals, research papers, presentations and news. From the studies, it has been said that the underinsurance in Malaysia is high as well as the awareness of the underinsurance. Underinsurance is quantified by the extent to which the citizens in a country are inadequately covered by the life insurance protection. Thus, to reduce the underinsurance, we need to calculate it to prevent the gap from getting larger.

Swiss Re (2004) use the concept of the life insurance protection gap to measure the underinsurance. Life insurance is one of the resources available in the conceptual framework of mortality protection gap. The inadequate of life insurance actually will effect an individual to be underinsured and it will also support an individual personal savings so that it can cover the resources required and therefore can sustain their routine life. Life insurance benefits an individual’s personal financial planning in many ways like debt repayment, wealth replacement, savings creation, and income replacement (Black & Skipper 2000). An article also published that death of the breadwinner in the household also can cause financial problems in the family as well as being underinsured. The most important way to manage the financial after the premature death of the breadwinner is possibly through the purchase of life insurance and this way is suggested by Black, Skipper and Black (2015). Based on Lewis (1989), the function of the life insurance is important to maintain the standard of living in a household when the breadwinner of the household are dead.

Life insurance are a significant tools for individuals and families in order to encourage long-term savings in public or private sector, Beck and Webb (2003). An important relationship has been discovered by Lin and Grace (2007) between the financial vulnerability and the total amount of the insurance purchased. As mention before, protection gap is the amount that an individuals need to cover or encounter to sustain their standard life. So, Swiss Re (2015) states that the protection gap is actually financial hardship that need to be encountered by the dependent after the death of the breadwinner in the household. The protection gap give reminder to the individual that they should take appropriate measure to make sure that adequate protection is accessible. It also give opportunities to the insurance company as they can enlarge their business as people will be encourage to increase their life insurance to ensure that they have adequate protection. However, with all the advantages of having life insurance, people tend to have misunderstanding of the insurance benefit and whether the agent can be trusted that preventing them from buying life insurance.

Life insurance protection gap is underinsurance that under the life insurance context. The definition of the underinsurance or also known as protection gap is mostly provided by Swiss Re (2004). According to the Swiss Re (2004), underinsurance is the difference between the resources available to the dependents after the death of the breadwinner and the resources required to maintain their standard living following the death event. People also think that they do not really need the insurance as there is a presence of social security benefits for dependent, Fitzgerald (1987) and the overestimation of the amount of cover held Swiss Re (2010). Schoen, C., Collins, S.R., Kriss, J.L., & Doty, M.M. (2008) defined the underinsurance based on a framework of adequate health care coverage that has been used in the underinsurance literature.

Underinsurance can be measured in different context which is health insurance and life insurance. Both context are popular and widely been research by the researchers. Blewett, Ward and Beebe (2006) define three dimensions of underinsurance that are being used in both health and life insurance. The three dimensions are economic, structural and attitudinal. In economic dimension, Auerbach and Kotlikoff (1991), Bernheim et al (2003), Kelly and Ngu (2010) considered that the economic can involve when the household finances are being measured. In term of structural dimension, it will based on whether an individual is uninsured for certain time period. The third dimension is the attitudinal which are can explain as perceptions towards life insurance that are being published by Swiss Re (2010) or the reasons why individuals not renewing their policies which has been investigated by Association of British Insurers (2010).

In a family, the death of a husband or breadwinner will cause their wife to be a widow which is always cause them to be in a financial difficulties. This will lead to the underinsured which has been showed by Bernheim, Carman, Gokhale and Kotlikoff (2003) and MetLife (2009). The widows that were underinsured had to make large adverse changes to their lifestyle so they can sustain their life. The rule of thumb is a traditional approach that are being used by the insurance salesperson in defining the underinsurance. A rule of thumb is actually a principle with a broad application that actually neither reliable nor accurate in every situation. According to Gokhale and Kotlikoff (2002), they argue that as the individual situations differ substantially, these approaches has being unsuccessful to provide useful solutions. To overcome that, an advanced of the conceptual framework for underinsurance has been introduced by Bashshur, Smith and Stiles (1993), then it being revise again by Blewett, Ward and Beebe (2006). Bashshur et al (1993) point out that underinsurance is certainly relative to how “adequate insurance” is defined. They defined the full coverage differently with the adequate coverage. Full coverage defined as insurance coverage that has full protection toward the purchaser while for adequate coverage will have less comprehensive benefits than the full coverage.

Bashshur et al (1993) divide the level of adequacy into three characteristics which is the same as the dimensions, economic, structural and attitudinal. It has been stated that the economic is one the dimensions of underinsurance, then Blewett et al (2006) argue that there are two main limitations when the economic dimensions are being calculated. One of the limitations is the differences of the income level among the individuals. The next one is the benefits in the insurance policy as it will be vary for every households as it mostly depends on the household income, composition, risk-aversion or ethnicity. Both structural and attitudinal also has their own limitations with calculating the dimension but we will be more focus on one of the dimensions which is economic dimensions. The limitations has been issued first by Bernheim, Forni, Gokhale and Kotlikoff (1999). They issued it using formal life cycle model to evaluate needs. They take account for the differences in every household characteristics and it cause the coverage level to be ungeneralised.

According to Kelly and Vu (2010), underinsurance refers to circumtances when there is a gap between the insurance level that is needed to provide a comfortable living after a loss event happen and the level is available through insurance policies. Underinsurance not only can affect the family members but also can give pressure toward government finances if it affect those who are vulnerable in our society. Underinsurance that effect government can be seen through less tax revenue and increased reliance on government payments. It happen when insufficient insurance is held to maintain an income after tax, mortgage repayments and childcare Kelly and Vu (2010).

There are many challenges regarding the underinsurance that we need to encounter. It require efforts to analyse the factors, effect and ideas or strategies to overcome the situation. Underinsurance are hard or impossible to avoid as there are a lot of countries especially large countries that being underinsured, by doing this study, we can not only educate and guiding the people about the awareness of underinsurance but also give the idea to insurance company to develop more attractive product as well as effective distribution channels. This study also help us to understand the gap that should be close and how industry take action to make it success. Underinsurance can be our top priorities in order everyone can live in standard lifestyle.

Introduction

This study will analyse the data to determine the underinsurance in Malaysia. as mentioned above, underinsurance always been research with life or health insurance.so, for this study it will focus more on life insurance in Malaysia. this study are being conducted to see the expected mortality gap or underinsurance among employed and unemployed population in 2017 who were insured under life insurance.

Asia-Pacific moratlity protection gap that published by Swiss Re is the first study being done featuring multiple markets in 2011 throughout Asia countries. In 2015, Swiss Re once again publisher the study of mortality protection gap. It took 4 years for the Swiss Re to make a research and published it for the public. The latest study published in 2015 which reports that the mortality protection gap in Asia has widened further between 2010 and 2014 but it has slower pace than in previous years. The mortality protection gap has increase from USD 42.1 trillion in 2010 to USD 57.8 trillion in 2014 in jut 4 years. This calculation is for Asian countries, so it include 13 countries including Malaysia. Mortality protection gap for Malaysia increase from USD 397 billion to USD 524 billion. The data are not published only for fun but to remind people the problems related to the underinsurance. It is a large financial difficulties for the families if in case they meet with unexpected events that people cannot figured out. People also need to be educated about insurance and the product that they provide to get better understanding for their good in the future. This is also a challenge to the insurers to take action by grabbing this opportunities to produce better product for their customers as well as place their company in the world of insurance. Insurer will give the best of them as they need to keep up with a lot of competitive insurers out there.

This study measure the mortality protection gap for employed and unemployed people in Malaysia. it not only expand the product development in insurance but also show the progress of growth in insurance. From the analysis from Swiss Re, it measures that working population with dependents are the group the need the financial protection the most based on the mortality protection gap. the moratlity protection gap also can be affect by the success of selling insurance product by insurers. In a region that has rapid ageing population and high income level also can effect the mortality protection gap as these conditions will cause them to take more protection. It has been showed between Malaysia and South Korea. The mortality protection gap per working person with dependents in Malaysia are much lower than in South Korea which is USD 79,014 to USD 402,589. High protection gap shows that the insurance products are in high potential demand as well as the significant business opportunities for insurers in Malaysia.

Based on the survey that have been done before this by other researchers, the reason why most of them did not purchased insurance is similar which is the lack of funds that contribute widen the gap. agents that sell and promote the insurance product also focused more in main cities compare to rural areas as it has large range of consumer. People commonly view the insurance product as savings or investment campare to protection product.

Data collection

The data collection will be find when the study for the underinsurance start.

Method of study

Monte Carlo Simulation will be used on measuring the underinsurance because it can provide a range of possible outcomes and the probabilities they will occur for any choice of action. For the understanding, we will use the conceptual framework to arrange the information and formula that we will be used.. for the conceptual framework, the resourced required will minus the resources needed.minus the resources available. Resources needed will be in two categories which is income to sustain their standard life and debt. Resources available will be three categories which is life insurance, personal saving and the gap. that is the formula in getting the basis of mortality protection gap. This study use different simulation with other studies from other countries which is Monte Carlo analysis. Monte Carlo is useful a its provide many possibilities with respect to the outcome and possibilities of the occurrence.

From the resources needed, this study need the data for the income and their debt repayment. The income is should be the income that they needed to sustain the standard living after the death of the breadwinner in the household. So, it will represent by household expenditure as it include all the basic needs that the household use like clothes, education, transport, food, health and many more. All the basic needs always incurred by the breadwinner in the house before they reach their age retirement or death. When this situation happen, the dependents still need this requirements which the reason why the household expenditure will represent the income needed to sustain standard living lifestyle. As the age of retirement will be the condition for the breadwinner, if the breadwinner choose to retire at age 60, the the required amount of income needed will be the present value of yearly income expenses until age 60 at any age of death. The working population 11% of their basic salary for the EPF contributions for their retirement expenses in the future. So, it needs to be measure too as it includes in the income needed and must be measure differently from the household expenditure as it is not one of the household expenditure. Then, the required amount of retirement needs will be represented by the present value of yearly retirement expenses until age 60, at any age of death. The data will be find in the EPF annual report for year 2017. The second poart for resources needed is the debt repayment expenses. The debt usually need to be paid before they reach age of the retirement at age 60 and individual may be die before the age retirement. So, the required amount of debt repayment needs will be represented by the present value of yearly debt repayment expenses until age 60, at any age of death. The data will be acquired from the Financial Stability & Payment System Reports, BNM. That concludes the element of resources needed.

The next one is from the resources available. As mentioned above, there is EPF saving and it will represented by accumulated EPF savings at the age of death. The individual will pay for EPF until they reach retirement age or they might die before that. The data als can be able to find from EPF annual report for the certain year. Next element is the personal savings which will be represented by accumulated personal savings at the age of death as they can die at any age. The data can be attained at annual statistics reports. For life insurance protection which is the next element of resources available will be represented by sums insured of all policies owned by the individual. It will measure for all the insurance that an individual take to make it as resources available once an incident happen to them.

The study will be computed based on same age distribution where the age will be between 20 to 60 years old. This study will be carried out using this method.

Expected result

From the study, we expect to that the result will be true. First, the mortality gap can be reduced if the sum insured for life insurance increase or the increasing of insurance purchase. The result will be find out one the study being doing. Next, the gap for the breadwinners in the families can also effect the gap. The gap for breadwinner that does not take insurance protection is higher than those who takes the protection. There also possibilities that a certain group age will be experience underinsurance. The age and accurate calculation can be shown once the study being carried out. In the study, the main result must be that by buying insurance can definitely close the gap even it is in small range. The results also can determine whether Malaysian households are being underinsured or not. It is important to know if there are a lot of people and family who are cannot sustain the standard living lifestyle after the death of the breadwinner. So, government and insurance company can increase the awareness of the people about the underinsured as well as helping them to reduce the gap.

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