Analyzing under Insurance in Malaysia: Impacts, and Strategies for Mitigation

The studies and findings related to underinsurance have been discussed in recent years. These findings have been proven and demonstrated in articles, journals, research papers, presentations, and news reports. These studies suggest that the level of underinsurance in Malaysia is high, as is awareness of the issue. Underinsurance is quantified by the extent to which citizens in a country are inadequately covered by life insurance protection. Therefore, in order to reduce underinsurance, it is necessary to calculate and analyze it to prevent the gap from widening.

Swiss Re (2004) uses the concept of the life insurance protection gap to measure underinsurance. Life insurance is one of the resources available in the conceptual framework of the mortality protection gap. Inadequate life insurance can result in an individual being underinsured, and can also support an individual’s personal savings so that they can cover the resources required to sustain their routine life. Life insurance benefits an individual’s personal financial planning in many ways, such as debt repayment, wealth replacement, savings creation, and income replacement (Black & Skipper 2000). An article also noted that the death of the breadwinner in the household can cause financial problems for the family, as can being underinsured. The most effective way to manage finances after the premature death of the breadwinner is possibly through the purchase of life insurance, as suggested by Black, Skipper, and Black (2015). Based on Lewis (1989), the function of life insurance is crucial to maintain the standard of living in a household when the breadwinner dies.

Life insurance is a significant tool for individuals and families, encouraging long-term savings in both the public and private sector (Beck and Webb, 2003). Lin and Grace (2007) discovered an important relationship between financial vulnerability and the total amount of insurance purchased. As mentioned before, the protection gap is the amount that individuals need to cover or meet in order to sustain their standard of living. Thus, Swiss Re (2015) states that the protection gap is the financial hardship that dependents have to encounter after the death of the breadwinner in the household. The protection gap reminds individuals to take appropriate measures to ensure that adequate protection is available. This also creates opportunities for insurance companies to expand their business, as people will be encouraged to increase their life insurance to guarantee they have adequate protection. However, misunderstandings about insurance benefits and trust in agents often prevent people from buying life insurance.

The life insurance protection gap is a form of underinsurance in the context of life insurance. Swiss Re (2004) mostly provides the definition for underinsurance, also known as the protection gap. According to Swiss Re (2004), underinsurance is the difference between the resources available to dependents after the death of the breadwinner, and the resources required to maintain their standard of living following this event. Additionally, some people believe they don’t need insurance due to the presence of social security benefits for dependents (Fitzgerald, 1987), or due to an overestimation of the amount of cover they already hold (Swiss Re, 2010). Lastly, Schoen, C., Collins, S.R., Kriss, J.L., & Doty, M.M. (2008) define underinsurance based on a framework of adequate healthcare coverage that has been used in underinsurance literature.
Underinsurance can be measured in different contexts, namely health insurance and life insurance. Both contexts have been extensively researched by scholars. Blewett, Ward, and Beebe (2006), defined three dimensions of underinsurance, which are frequently used in both health and life insurance. These dimensions are economic, structural, and attitudinal. In the economic dimension, Auerbach and Kotlikoff (1991), Bernheim et al. (2003), Kelly and Ngu (2010) hypothesize that economic factors become relevant when household finances are being measured. Regarding the structural dimension, this mainly revolves around whether an individual is uninsured for certain time periods. The attitudinal dimension can be explained as perceptions towards life insurance, as published by Swiss Re (2010), or the reasons individuals do not renew their policies, as investigated by the Association of British Insurers (2010).

In a family setting, the death of a husband or breadwinner can plunge the widow into financial difficulties. This situation often leads to underinsurance, as demonstrated by research from Bernheim, Carman, Gokhale, and Kotlikoff (2003) and MetLife (2009). As a result, underinsured widows are often required to make drastic lifestyle changes to sustain themselves. The “rule of thumb,” traditionally used by insurance salespeople to define underinsurance, is a principle with broad application. However, it is not always reliable or accurate in all situations. Gokhale and Kotlikoff (2002) argued that individual circumstances vary greatly, and thus, these general approaches often fall short. To address this, an advanced conceptual framework for underinsurance was introduced by Bashshur, Smith, and Stiles (1993) and later revised by Blewett, Ward, and Beebe (2006). According to Bashshur et al. (1993), underinsurance is relative to how “adequate insurance” is defined. They distinguish “full coverage” from “adequate coverage,” the former providing full protection to the purchaser and the latter offering less comprehensive benefits.

Bashshur et al. (1993) categorize the level of adequacy into three characteristics, identical to the three aforementioned dimensions. While economic is one dimension of underinsurance, Blewett et al. (2006) argue that there are two main limitations when calculating the economic dimension of underinsurance. The first limitation is the income differences among individuals, and the second is the variation in benefits offered by insurance policies. Such policies usually depend on factors such as household income, composition, risk-aversion, and ethnicity. Both structural and attitudinal dimensions also have their limitations in calculating underinsurance. However, the focus here is mainly on the economic dimension. These limitations were first identified by Bernheim, Forni, Gokhale, and Kotlikoff (1999), who used a formal life cycle model to evaluate needs, taking into account the diverse characteristics of households, leading to a lack of a universal coverage level.
According to Kelly and Vu (2010), underinsurance refers to circumstances when there is a gap between the insurance level that is needed to provide a comfortable living after a loss event happens, and the level available through insurance policies. Underinsurance can not only affect the family members but also place pressure on government finances if it affects those who are vulnerable in our society. The effect of underinsurance on the government can be seen through reduced tax revenue and increased reliance on government payments. This happens when insufficient insurance is held to maintain income after tax, mortgage repayments, and childcare, as suggested by Kelly and Vu (2010).

There are many challenges regarding underinsurance that we need to address. It requires efforts to analyze the factors, effects, and ideas or strategies to overcome the situation. Underinsurance is difficult, or impossible, to avoid as there are many countries, especially large ones, that are underinsured. By conducting this study, we can not only educate and guide people about the risk of underinsurance but also help insurance companies develop more attractive products and effective distribution channels. This study also helps us understand the gap that needs to be closed and how the industry can take action to achieve success. Making underinsurance a top priority ensures that everyone can maintain a standard lifestyle.

Introduction

This study will analyse the data to determine underinsurance in Malaysia. As mentioned above, underinsurance has always been researched with life or health insurance, so this study will focus more on life insurance in Malaysia. This study is being conducted to observe the expected mortality gap or underinsurance among the employed and unemployed population in 2017 who were insured under life insurance.

The Asia-Pacific mortality protection gap published by Swiss Re is the first study done featuring multiple markets in 2011 across Asian countries. In 2015, Swiss Re published another study on the mortality protection gap. It took 4 years for Swiss Re to research and publish it for the public. The latest study published in 2015 reports that the mortality protection gap in Asia has widened further between 2010 and 2014, albeit at a slower pace than in previous years. The mortality protection gap increased from USD 42.1 trillion in 2010 to USD 57.8 trillion in 2014 in just 4 years. This calculation includes 13 countries, including Malaysia. The mortality protection gap for Malaysia increased from USD 397 billion to USD 524 billion. The data was not published merely for entertainment but to highlight the problems related to underinsurance. This scenario presents significant financial difficulties for families if they are faced with unexpected events. People do need education about insurance and the products they provide for better understanding of why it’s necessary for their future. It also poses a challenge for insurers to seize this opportunity to produce better products for their customers and to establish their company in the insurance landscape. Insurers strive to stay competitive among other contenders.

This study measures the mortality protection gap for employed and unemployed people in Malaysia. It not only expands the product development in insurance but also tracks the progress of the growth in insurance. According to the analysis from Swiss Re, the working population with dependents is the group that needs financial protection the most based on the mortality protection gap. The success of insurance product sales also impacts the mortality protection gap. A region with a rapidly ageing population and high-income levels can influence the mortality protection gap too. This could lead individuals to obtain more protection. This has been exhibited between Malaysia and South Korea. The mortality protection gap per working person with dependents in Malaysia is much lower than in South Korea, at USD 79,014 compared to USD 402,589. A high protection gap indicates high potential demand for insurance products and significant business opportunities for insurers in Malaysia.

According to surveys conducted by other researchers, the primary reason many people do not purchase insurance is due to lack of funds, which consequently widens the gap. Agents selling and promoting insurance products are also more focused on city areas compared to rural territories, as the former has a larger consumer base. People commonly perceive insurance products as savings or investment tools rather than protection products.

Data collection

The data collection will commence when the study for underinsurance begins.

Method of study

The Monte Carlo Simulation will be used to measure underinsurance as it can provide a range of possible outcomes and their probabilities for any chosen action. To better understand, we will arrange the information and formula using a conceptual framework. In the conceptual framework, the resources required will be deducted from the resources needed and available. Resources needed fall into two categories: income to sustain their standard of life, and debt. Resources available fall into three categories: life insurance, personal savings, and the gap. This is the formula for calculating the basis of the mortality protection gap. This study uses a different simulation from other studies from other countries – the Monte Carlo analysis. Monte Carlo is useful as it provides many possibilities regarding the outcome and possibilities of occurrence.

From the resources required, this study requires income data and debt repayment data. The income should be that which is needed to sustain standard living after the death of the household breadwinner. This will be represented by household expenditure, including all the basic needs such as clothes, education, transport, food, health, and many more. These basic needs are typically covered by the breadwinner before they reach retirement age or die. In such situations, dependents still require these amenities, hence why household expenditure represents the income needed to sustain a standard lifestyle. If the breadwinner chooses to retire at age 60, the required amount of income needed will represent the present value of yearly income expenses until age 60, at any age of death. The working population contributes 11% of their basic salary to the EPF for future retirement expenses, which should be measured too as it is included in the income required. It must be measured differently from the household expenditure as it is not part of it. Then, the required amount for retirement needs will be represented by the present value of yearly retirement expenses until age 60, at any age of death. This data can be found in the EPF annual report for the year 2017. The second part of the resources required is the debt repayment expenses. The debt usually needs to be paid off before retirement at age 60, and individuals may not live until retirement. Thus, the required amount for debt repayment will represent the present value of yearly debt repayment expenses until age 60, at any age of death. This data will be sourced from the Financial Stability & Payment System Reports, BNM. That concludes the element of resources needed.

The next part comes from the resources available. As mentioned above, there is EPF savings represented by accumulated EPF savings at the time of death. The individual will contribute to EPF until they reach retirement age or possibly die before then. This data can also be found in the EPF annual report for a given year. The next element is personal savings, represented by accumulated personal savings at the time of death. The data for this can be found in annual statistics reports. The next resource available is life insurance protection, represented by the sums insured of all policies owned by the individual. It will be measured for all the insurance that an individual has, in case of an unforeseen incident.

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

Expected result

From the study, we expect the results to be significant. First, the mortality gap can be reduced if the sum insured for life insurance increases, or if there is an increase in insurance purchases. The findings will be determined once the study is being conducted. Next, the gap for the breadwinners in the families can also affect the insurance gap. The gap for a breadwinner who does not take insurance protection is higher than for those who do take the protection. There are also possibilities that certain age groups will experience underinsurance. The age and accurate calculation can be shown once the study has been carried out. In the study, the main result must be that buying insurance can definitely close the gap, even if it is within a small range. The results can also determine whether Malaysian households are underinsured or not. It is important to know if there are many people and families who cannot sustain the standard living lifestyle after the death of the breadwinner. Thus, the government and insurance companies can increase the awareness of people about being underinsured, as well as helping them to reduce the gap.

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