Chapter# 1: Introduction
The present study suggests the intersection of behvaioural economics and life insurance. The increase in probability of mortal illness in the community including blood pressure and diabetes increased the dependence of people on insurance. Senthillingham (2016) reveals the rate of blood pressure is highest compared to the last forty years. he further identifies the rate of obesity is ten times higher in children today compared to the past. The statistics depicts 213 million adolescents are victims of obesity. The results presented in a survey indicates that 31 million people having ages between 5 to 19 years are obese. The increased prevalence of obesity in current generation exhibits their declined health statuses. Obesity is more prevalent in low and middle income groups. The standard definition states, “obesity in adults is defined using a person’s body mass index, the ratio between weight and height. A BMI of 18.5 to 24.9 is classified as a healthy weight, 25 to 29.9 considered overweight and 30 and over obese” (Senthilingam, 2017).
Frank (2011) determines diabetes as another prominent health issue prevailing in present generation. The increased prevalence of diabetes II among people reflects the existence of health crisis at global level. Obesity is one of the growing problem encountered by all regions of the world. Increased prevalence of diabetes reveals the unhealthy lifestyles of the individuals that also highlights the risks of early deaths. Current generation face high risks of developing diabetes due to the unhealthy lifestyle patterns, unhealthy diets and genes. The statistics depicts that 285 million people suffered from diabetes in the year 2010. The forecast indicates that the number of people suffering from diabetes will reach 438 million by 2030 (Frank, 2011). Irrespective to increased prevalence of diabetes and other health issues, the insurance industry experienced a consistent drop globally for the last five years. The statistics reveals that the dependence of people on insurance policy declined due to the macroeconomic factors. Slow economic growth declined the reliance of people on insurance policy (Deloitte, 2018).
Macroeconomic growth remained slow in 2016-17 with unexpected political developments. Global reinsurance capital reached at high levels while the market remained competitive. In North American markets the growth momentum of insurance declined in 2016 (2%) compared to the previous years statistic (4.2%). The factors affecting the growth of insurance globally include global economic volatility and fluctuating regulatory oversight. Evolving capital requirements also increased the risks of investment. Insurance growth in America remained marginally lower in 2016-17 compared to previous years growth. The commercial lines experienced decline that influenced the growth of insurance industry. North America experienced high rates of losses due to the changing attitudes of people towards insurance. Expansionary fiscal policy also influenced the growth of insurance industry (EY, 2017). The trends of 2016-17 depicts that the insurance companies face challenges to survive in America due to the decline in insurance industry’s growth. The political and regulatory issues influenced the purchasing attitudes of the customers (Fukukawa, 2002). The changing dynamics suggests the companies taking adequate steps to manage regulatory upheaval and transforming operating standards and procedures for targeting wider customers. The current trends also indicates the insurance companies will explore new ways to attract the customers. It depicts the need for differentiating products, services and distribution platforms (Deloitte, 2018).
The reliance of customers on insurance policy depends on the ability of clients to take logical decisions. The main incentive of customers to buy insurance policy is to protect themselves. Behavioral economics remains one of the significant field that explains the reasons behind the insurance related behaviors of individuals. Behavioral economics suggests that the decisions of customers towards insurance policy are not always rational or logical due to their inability to assess cost-benefit analysis (Poon & Hurley, 2016). The role of emotions on the purchase decision exhibits the irrationality as they fail to estimate the benefits or losses. Adam smith remains one of the oldest economist who uncovers the self-interest and disclosing of preferences associated with their well-being. The theory of consumer choice reveals the significance of psychology, anthropology, neurology and evolutionary biology. Traditional consumer choice theory is effective in understanding the general response of the customers towards insurance policy (Chaudhary, 2016). Life insurers assume that purchasing protection is logical and rational. However in real life scenario rarely people think rationally when they make decisions related to insurance. Behavioural economics explains the factors that individual consider while making insurance related decisions. It is irresistible for the people to avoid purchasing an insurance policy that include benefits for the buyer. The decision of buying insurance policy is not different that of buying a lottery ticket as both motivate people to perchance it in order to gain extra advantage. The concept of risk coverage and cost influence the consumers decision of buying insurance policy. Though buying insurance involve rationality according to the theorists but the consumers do not make rational choice always (Poon & Hurley, 2016).
The present paper attempts to analyze consumer behavior towards insurance, studied through lens of traditional consumer choice theory and empirical evidence provided by cognitive psychology, anthropology and neurology. The consumer choice theory explains the irrationality of people in deciding about the purchase of insurance. Different fields identified helps in determining the factors that influence the rational behaviours of individuals. The paper also explores how these factors impacts the market life insurance and increased global sales. In the light of cognitive psychology and neurology the research also identifies the reasons of slow growth in the insurance industry. The paper also incorporates the behavioural economics to understand the incentives responsible for motivating individuals towards insurance and assessment of the rationality. The science of behavioural economics explains the reasons of shift in community’s attitude towards insurance. The comparison of the rationality and irrationality highlights the factors responsible for motivating or discouraging individuals in decision-making. As the statistics on insurance industry reveals a decline in its business, the study uncovers the factors responsible for that decline (Narender & Sampath, 2014).
Research questions
- Is life insurance irrational?
- Does consumer choice of buying insurance relies on the intersection between behavioural economics and life insurance?
- Does rationality always motivates individuals towards purchase of insurance?
- Does decline in the global insurance trends exhibits the irrationality of consumers?
Chapter# 2: Literature review
The literature review involves discussion of empirical evidence obtained from scholarly database. It presents findings of research articles, journals, papers, and other online sources previously conducted. Available research studies on consumers buying behaviours and decisions related to insurance helps in understanding the factors that support insurance markets (Ragunathan, 2016). The information retrieved from scholarly database contributes to understanding relationship between irrational behavior and decision of purchasing life insurance. Literature review is useful in justifying the reasons of research and demonstrates the knowledge related to the topic under discussion. Literature review is also useful in establishing theoretical framework for the study (Mathur & Tripathi, 2014).
2.1 The irrational consumer and consumer behavior
Psychologists and economists conceptualize the phenomena of irrationality since the times of Adam Smith and Jeremy Bentham to determine reasoning behind illogical decisions and assumptions. They considered self-interest as the most significant factor contributing to buying decisions. The theorists represent deeper insights into the study of irrationality and maximization of utility. The choices that customers make in market places uncovers preferences and assessment of their well-being. However the buying decision of consumers depends on the most preferential options under the assumption that logical decisions are true. Economic methods are inadequate to explain the logic behind the irrational buying decisions of consumers, depicting the need for psychological theory and reasoning. The most agreeable point among economics and psychologists is the preferential options.
Theory suggests that consumers make logical decisions to choose the most preferential option among alternatives. The decisions of customers relies on their preferences and the principle of utility maximization. William Jevons defines the concept of irrational behavior as; “we can no more know nor measure gravity in its own nature than we can measure a feeling; but, just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind” (Jevons, 1879). Economists uncover the factors that influence decision making of the consumers. They identify irrationalities as common trait that influences the decision making of individuals. The theory determines the internal and external factors influencing the decisions of consumers. Self-interest and cost-benefits calculations are common tools used to uncover the reasons behind irrational decisions. It is not always utility that impacts the decisions of buying, sometimes emotional play crucial role in irrational activities such as smoking, excessive driving, using credit cards and over eating (Frank, 2011).
The assessment of the consumer behaviors rely not only on economics but it also depends on the aspects of cognitive psychology and neurology. The economists rely on the consumer choice theory to determine the logic behind the buying patterns of individuals. Economic analysis of the consumers behavior relies on the factors that motivates them to buy a commodity. The theory does not restrict the evaluation to the predictive indicators in terms of choice and well-being. Behavioural revelations suggest the role of continuing development of the choice theory (Poon & Hurley, 2016). McFadden (2012) attempts to uncover the role of different factors such as cognitive psychology, anthropology and neurology on the consumer preferences and decisions of buying commodities. Behavior of individuals relies on the perceptions and emotions. Evidence suggests that the interpretation of authors varies according to the theory however happiness and utility are most agreeable traits among economists (McFadden, 2013).
Jeremy Bentham remains one of the prominent theorist defining the role of pleasure, plain and utility in formation of human actions. In his philosophy, ‘Introduction to the Principles of Morals and Legislation’ (1789) he discussed the concept of self-interest and its relevance with pleasure and pain. The central notion behind the theory of Bentham states that happiness is the prominent reason behind human decisions. He also determined the relationship of happiness with self-interest. The purpose of the philosopher is to express the reasons behind human actions and incentives causing them. The concept of utilitarianism also provides sufficient reasoning behind the actions and motivation of humans. The concepts of Bentham were adopted by his successors in interpreting the purchasing attitudes of humans. Bentham conferred the idea that the action or decision of human being is the result of self-interest and viewed as automatic consequence.
However the theory involved limitations, as measuring happiness or utility was not possible. The concepts presented by Bentham resonate with the contemporary behavioral theory but does not fulfill the conditions of neoclassical synthesis. The theory suggests that the experience of sensation causes action depending on two factors; increase in pleasure or reduction in pain (McFadden, 2013). The decisions that human takes are to increase joy or to minimize sufferings. To understand utility it is important to consider the consequences of actions. Bentham to support his theory of pleasure determines increased pleasure and reduction in pain as two sources of happiness. He also identified the role of contemporary science behavior and suggested that people perceives gains and losses in different manner.
His critical dimensions of utility of experience helps in understanding the role of duration, intensity and uncertainty on human actions. Bentham’s concept of reprocity illustrating reasons behind human actions suggest; “by the self-regarding principle, the more urgent the need a man feels himself to have of the kindness and good will of others, the more strenuous and steady will be his exertion for the obtaining it. The stronger a man’s need of the effective benevolence of others, the stronger the inducement he has for the manifesting effective benevolence as towards them” (Jeremy Bentham, 1876).
Adam Smith also remains prominent economists involved in studying the human behaviors and purchasing decisions. He presented the concepts of value in use and value in exchange to study the factors leading to certain actions. Gossen (1854) further determined the role of utility on human decisions. The incentive for humans is to attain maximum utility with their purchasing while the utility diminishes with increase in consumption (Gossen, 1854). Dupuit (1844) proposed a marginal utility curve to study the impact of consumption and its impact on human actions. The marginal utility curve for a good explains that the utility remains constant to a certain extent. Any purchase that increases that point results in utility decline. Relative utility remains one of the significant tool determining relationship between pleasure and purchase decision (Dupuit, 1884).
Frank Taussing (1912) explained the concept of utility as; “doubtless, too, people often buy things which, though yielding pleasure for the moment, or postponing pain, are in the end harmful. But here … we must accept the consumer as the final judge. The fact that he is willing to give up something in order to procure an article proves once for all that for him it has utility – it fills a want” (McFadden, 2013). Bentham on contrary presents a more realistic approach as the purpose of consumption is attain happiness and satisfaction. The purchases that an individual makes is for finding happiness while utility is state of being involving consequences. Bentham emphasized on the notion of increased pleasure and reduced pain.
Meller (2000) and Lowenstein (2003) identifies that the economic decision-making does not rely on single calculations. Consumer choice hypothesis of more relevant in determining the prospects of purchase decisions. The aspects of economic decision-making does not rely on the calculations. Role of emotions is significant in the buying behaviors of the individuals. Trevisan (2016) explains the behavior of consumers and the element of rationality in their buying decisions. The author highlights the factors motivating consumers to make a purchase. Behavioural economics provides the organizational perspectives effective for engaging consumers explaining the dynamic of choices. Application of behavioral economics helps in understanding the attitudes and decisions of individuals towards buying insurance or other products. The primary factor behind the purchase that consumers make is satisfaction. The purpose of buying things is to gain satisfaction. Their exists a strong correlation between buying and level of satisfaction. Consumers are more likely to buy goods that lead to high satisfaction (Trevisan, 2016).
Relating insurance with behavioral economics Poon, Ronald and Hurley (2016) identifies a significant connection between the two. They revealed, “logically, life insurance is a good thing, but even scientifically targeted clients might have a raft of rational sounding reasons not to buy, such as: they don’t trust advisers and insurers; insurance agents are intrusive; the process takes too long; life insurance is expensive; and the benefits are confusing” (Poon & Hurley, 2016). Consumers when consider emotions in their purchases they may act irrationally. Literature also uncovers that attaining rationality under influence of emotions becomes almost impossible. The other way of stating the fact is that, avoiding emotions during purchase decisions leads to rational decision-making (Trevisan, 2016). Literature further suggests that the situations also influence various purchase decisions of the people. The scholarly database on understanding insurance related behaviours relies on heuristic behvaiours, the anchor effect, the deal effect, framing effect and the self-control effect.
2.1.1 Heuristic behavious
heuristic behaviors explain the irrational decision of the consumers leading to the decision-making of insurance. The evidence suggests the role of mental strategies of simplification on the purchase decisions of consumers. The consumer needs to consider available information into account while making a choice. Trevisan identifies the impact of different options available for the consumer. Psychology considers Heuristic as a simple efficient rule for making judgments during different situations that an individual encounters. Heuristic behaviors allow people to solve problems when they need to make a choice. The rule of thumb permit individuals to function without discontinuing thinking about the future action. Heuristic behaviors are helpful in many real-life cases but they also lead to cognitive biases (Cherry, 2017). The mental strategies involved in the heuristic approach simplifies the things thus allowing people to analyze the situations more efficiently and take a logical decision. Heuristic has significant role in problem solving and decision making.
Jasperesen and Aseervatham (2017) studied the impact of heuristic behaviors on insurance related decisions. The findings identifies, “Positive incidental affect and integral affect increase the use of the representativeness heuristic, while negative incidental affect has no effect. Our findings have statistical and economic significance and carry implications for insurance companies and regulators” (Jaspersen & Aseervatham, 2017). The results of the study highlights the positive role of heuristic behaviors in making a purchase decision related to insurance policy. Heuristic thinking has significant impact on human thinking under influence of risk and uncertainty (Jaspersen & Aseervatham, 2017). Besides et al., (2012) uncovers the relationship between heuristic behavior and decision-making. The purpose of the study was to determine the impact of heuristic thinking on the purchase decision of insurance.
To make purchase individuals express satisfaction as it remains the primary motivator behind their decision-making power. Under heuristic behaviors the optimal decision-making and choices varies with age. The results of the study depicts the chances in the decisions related to the purchases of insurance with the age. Heuristic behaviors were more common during the decisions related to the purchase of insurance plan and Medicare plan (Besedeš, Deck, Sarangi, & Shor, 2012).
Laury and Mcinnes (2001) explores the role of heuristic behaviors in decisions related to the insurance plans. Endogenous risk categorization remains one of the significant factor during making decision related to the purchase of insurance. The heuristic approach is useful as it leads to informed decision-making. Significant differences prevail regarding insurance related decisions of individuals. Insurance prices and the associated benefits play significant role in making insurance related decisions. The optimal decision-making depends on the actuarially fair choice of insurance available to the consumers.
The approach suggests that people are less likely to purchase insurance when they face high probability of loss. The decision of individual relies on the comparison between probabilities of benefit and loss. When an individual perceives that the probability of benefit is high he will decide to purchase insurance. Consumers expectation of loss under heuristic rule of thumb explains the reasons for not purchasing insurance policy. Insurance prices plays dominant role in the decision-making process. When the prices are high that exhibits chances of losses the consumer will change the decision of purchasing insurance policy. The rule of thumb states that, “if the relative prices of insurance contracts correctly reflect the relative probability of loss, the price of each contract may be an important signal of the risk of each choice or activity” (Laury & McInnes, 2001).
Trevisan (2016) identified the impact of heuristic behavior on the judgment of consumers. The results of the experimentation reveals that among selected sample size 48% individuals who were offered saving accounts reflected purchase decisions when the interest rate was maintained at 1% to 2%. The interest rate greater than 2% eliminated the possibilities for availing option of saving accounts (Trevisan, 2016).
2.1.2 The Anchor Effect
The anchor effect confers the idea that the economic behavior and purchase decision of consumer relies on the concept of utility. Theory suggests that individuals use the prior price knowledge to make decision regarding purchase. The reliance of consumers on previous knowledge can be ineffective as it leads to irrational decisions. The price may fail to provide rational choice to the individual that influence the decision-making (Trevisan, 2016). Orr and Guthre (2006) studied the impact of anchor effect on the purchase decision of individuals related to the insurance policy. The study reveals that, “due to a phenomenon that psychologists call ‘anchoring’, we are often unduly influenced by the initial figure we encounter when estimating the value of an item. This initial value serves as a kind of reference point or benchmark that anchors our expectations about the item’s actual value” (ORR & GUTHRIE, 2006). The study stresses on the negotiation experiment for assessing the role of anchoring effect. The effect has significant influence on the negotiation outcomes. The study results depicts that anchoring effect has strong correlation with the negotiation outcomes. The two factors limit the impact of anchoring on the decisions related to the purchase of commodity (ORR & GUTHRIE, 2006).
Tversky (2016) presented the logical decision behind the purchase of insurance policy. The price of the commodity influence the judgment and rationality of the decision. The results of the experimentation conducted by Tversky reveals that respondents were willing to accept saving accounts option with the credit card when the interest rate remained stable at 1% to 2%. The prospect theory also suggests that the people underweight outcomes when they doubt about certainty that influence the rationality of the decisions (Kahneman & Tversky, 1979). Krieger and Felder (2013) studied the impact of decision biases on insurance outcomes. The rationality of the decision involve the well defined preferences of the consumers. Decision biases holds significant role in health policies and insurance plans (Krieger & Felder, 2013).
2.1.3 The Deal Effect
Literature on consumer behavior regarding insurance policy also relies on the deal effect. The approach offers a fundamental mechanism that is useful in understanding the purchase decision and judgment of individuals. The approach shows relevance with the theory of consumer choice presented by Richard Thaler in 1980. The theory emphasizes on the rational maximization model. It provides justification for the decision that consumer makes in choosing between various options. The decision depends on the choice of good predictor. Thaler mentioned that, “the capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world or even for a reasonable approximation to such objective rationality” (THALER, 1980).
The deal effect also explains the reasons for which an theory fails to predict behaviors. Prospect theory is vital in explaining the descriptive choice models leading to a decision-making position. Kahneman and Tversky support their claims by using the prospects theory. The theory suggests that the probability of risk influence the decisions of rationality. Expected utility theory explains that the decision of a consumer depends on the outcomes of utility. Maximization of utility remains the central concern of the consumer. There is intersection of certain and uncertain outcomes influence the decision of the consumers. Uncertainty influence the problem of choice affecting the judgment of consumers. Thaler further uses the opportunity cost to explain the decision of the consumers. High opportunity cost of a commodity lowers the power of purchasing as consumer will be less willing to pay for it (THALER, 1980).
Trevisan (2016) also explains the role of new deal affect in explaining the decision of consumers regarding insurance policy. The research explains the factors affecting the choice between current account and the purchase of credit card. Pricing influence the decisions of the consumers. The findings obtained from the study of participants behavior reveals that the package offered current account at 1 euro with credit card at 2.50 euros. The results depicts that majority (59%) of the consumers accepted the deal. Only 41 percent of consumers selected the option of current account. When the deal offered only credit card at the rate of 2.50 euros the purchase decision of the consumers changed. The results indicate only 17% of respondents reflected their willingness to accept the deal of purchasing credit cards. The consumers faced alternative sets of options where they had to choose either a current account alone or current account with the credit card. The assessment of risk and loss helped them in judgment. The results of the experiment reveals that when the customers were getting the option of buying credit card with the current account option they reflected high willingness. The results also depicts that individuals only expressed willingness when the prices were flexible (Trevisan, 2016).
2.1.4 The Framing Effect
According to the prospects theory people are risk averse as they aim at avoiding risks and losses. Framing effect influence the decisions of the consumers regarding purchase of insurance plan. Element of risk influence the decisions of the purchasers in different situations. Mishra, Gregson and Lalumiere (2012) explored the role of framing effects on the purchase decisions of individuals. The study uncovers the factors that affect the rationality of decisions. The framing effects suggests the need for rational decisions. The choice varies according to circumstances in prospects theory. The prospects theory suggests that people display framing effect as the utility derived from the gains diminishes steeply. The risky behavior involved in prevention of the risk or loss works under rule of thumb when utility diminishes rapidly. “According to risk-sensitivity theory, decision makers should prefer high-risk options in situations of high need, when low-risk options are unlikely to meet those needs”. The theory illustrates that risk sensitive decisions involve need and framing. High need and high risks will motivate a person to avail the option irrespective of the positive or negative framing. In situation of high need involving element of high risk, an individual will exhibit risk accepting behaviours (Mishra, Gregson, & Lalumie, 2012).
Mishra and Fiddick (2011) explored the impact of need and risk on framing decisions. People will violate the assumptions of the prospects theory when the need for purchasing a product is high. Needs are independent of the decisions of framing, remaining one of the visible factor for rational decision. The literature on the framing effect depicts that individuals are most likely to accept risks when their need is high. The results of the study depicts that framing effects remain significant part of behavioural decision-making (Mishra & Fiddick, 2011). Framing effects are also visible in risk sensitive decisions. The results of the study reveal that framing effects are visible in decision-making tasks involving risky choices. The risk-acceptance among participants was high in case of negatively framed decisions. While the risk acceptance was low in the positively framed decisions. Similarly risk acceptance is also high in cases where participants exhibits high need compared to the scenarios displaying low need (Mishra & Lalumiere, 2010). Wang (2002) uncovers the limitations of the prospects theory. The theory is effective in considering the framing effects and the risk preferences but it fails to consider the role of need. According to the framing effect the need remains one of the prominent factor in determining the behavior of individuals (Wang, 2002).
2.1.5 Self-control effect
Self-control theory explains the role of one’s desires on rational decision-making. If people are impatient they are less likely to save their incomes. Immediate consumption of the people will undermine their potential to invest in insurance plan. The self control theory suggests string correlation between self control and purchase decisions. People who exhibit low self-control will eliminate the possibilities of availing insurance policy. Time discontinuing model depicts low future desire to save. Tanaka and Murooka (2011) noted that, “naïve agents delay immediate‐cost future‐reward activities when it is better to do these earlier, and do immediate‐reward future‐cost activities when it is better to wait” (TANAKA & MUROOKA, 2011). Rational decision-making has positive relationship with future prospects of saving. The theory transmits the notion that people who are more concerned about future reward exhibits high self-control and are capable of discontinuing current consumption (TANAKA & MUROOKA, 2011).
Gannon (2006) studied the role of self-control on insurance decisions. Self-control theory also depicts the need for identifying the competency of the insurance company. The individuals who lack self-control are more likely to fall victims for insurance frauds. The theory exhibits the need for controlling desires to avoid irrational decisions (Ganon, 2006). Stromback (2017) identifies the role of self-control theory on financial decisions. the psychological characteristics of human behavior have significant influence on buying attitudes. Economic behavior plays crucial role in financial decisions and financial well-being. The savings of individuals depicts effective role of self-control and rational judgments. People exhibiting good self-control are more inclined to save money for future compared to people having poor self-control. The financial well being of people depends on their ability to control self (Strömbäcka, Linda, Skagerlundb, Västfjällabc, & Tinghög, 2017).
Chapter# 3
Methodology
The present research uses exploratory study to assess the role of rational behaviors in insurance related decisions. The study relies on empirical evidence obtained from scholarly database uncovering consumer-buying patterns towards insurance policy. The empirical evidence is also useful in determining the factors associated with the purchase decisions of the consumers (Sale, Lohfeld, & Brazil, 2002). The research relies on the observations of the facts associated with the issue under discussion. The current research will assess the results obtained from literature on economic behavior and insurance related decisions of individuals (Beckett, Hewer, & Howcroft, 2000). The comprehensive review of the literature on the topic under discussion allows revealing the theories that plays vital role on determining individual behaviors. The present study is descriptive in nature as it explores the historical factors responsible for consumer rationality (Mingers, 2001). Descriptive research is vital in answering the research questions as it provide results of various scholarly database. The approach is useful as it provides analysis of non-quantified topics. The research methodology is also effective for the present research as it allows integration of the qualitative and quantitative methods (Williams, 2007).
The descriptive study in the present research aims at identifying the reasons behind the consumer behaviors regarding insurance decisions. The descriptive study is useful in understanding the factors that encourage individuals towards insurance. It relies on a survey method that investigates the individuals regarding their decisions related to purchase of insurance. Through survey method the study targets 150 individuals and explore their consumption attitudes, the results obtained form the survey are used to assess the factors that influence the rational decisions of the individuals. The survey involve questionnaire technique to inquire the respondents (Sidhardha & Sumanth, 2017). The survey technique targets the respondents chosen randomly including both males and females. Direct questions from the participants of the survey permits the researcher to reveal the factors that influence the insurance related decisions of the consumers (Cooper & Schindler, 2001).
The assessment of the current trends of the insurance industry in US also reveals the statistics on the consumption pattern of the people. The analysis of the insurance statistics helps in understanding the behavior of consumers towards saving and insurance policy. The rates of growth and declining of improving factors suggests the realistic impacts of rational decision-making and judgments on the consumption attitudes of the people (Cooper & Schindler, 2001). The main components that the questionnaire covers in the assessment of consumers views regarding insurance involve home insurance, car insurance and life insurance. The responses helped in understanding the rationality associated with the decisions of choosing different insurances. the category of home insurance highlights the protection offered against the risks of property including, fire, theft and natural disasters. The car insurance reveals understanding of consumers protection against vehicle damage. The protection involve damage waivers. Life insurance uncovers the decision-making of consumers regarding protection of their life (LE, 2017).
Chapter# 4: Results
The results of the study relies on the responses obtained from the participants of the survey. The demographic information reveals that majority of the respondents (78%) were males. The survey included respondents belonging to different age groups to assess the impact of age on the purchase decisions related to insurance. Majority of the participants belonged to the age group of less than 30 years and between 31- 40 years. The survey included respondents with different educational levels to assess the role of education on rational decision-making. The results depicts that majority of respondents (46%) acquired educational degrees of post graduation while 30 percent acquired graduation degrees. Among selected sample size most of the participants (64%) were employed while 22% were self-employed. Students constituted only 14% in the survey.
Table Demographic factors
| Description | Frequency | Percentage |
| Gender
Male Female Total |
117
33 150 |
78
22 100 |
| Age
Below 30 years 31-40 41-50 51-60 Above 60 |
48
45 36 21 0 |
32
30 24 14 0 |
| Education
Under graduate Graduate Post graduate Doctor Others Total |
21
45 69 15 0 150 |
14
30 46 10 0 100 |
| Occupation
Student Employee Self-employed Total |
21
96 33 150 |
14
64 22 100 |
The results obtained from the study depicts that respondents decisions regarding monthly investments varied. The responses of the participants indicate that 40% of the participants made monthly investments of less than 10%. It also shows that the majority (52%) of participants made monthly investments between 11-20%. Only 4% of respondents engaged themselves in monthly investments of more than 20%. The responses associated with the kind of investment indicates that 22% respondents engaged them short-term investments while 78% relied on long-term investments.
Table Monthly investment
| Description | Percentage | |
| Monthly investment | Below 10%
11- 20% 21-30% 31-40 Total |
40%
52% 4% 4% 100 |
| Kind of investment | Short-term
Long-term Total |
22%
78% 100% |
The results attained from the survey also exhibits the factors that influence the purchase decision of individuals related to the insurance policy. The responses of the respondents depicts that 18% respondents purchased insurance, as it was part of company’s policy. Among chosen sample, 14% availed insurance for the service quality while 35% availed the option for return on investments. The majority participants availed insurance for receiving returns. The results further depicts that the factors that influenced buying decisions varied among participants. Majority of the respondents (24%) availed the option of insurance on advisor’s advice and 23% availed it under influence of family. it also reflects that 11%respondents selected the option due to personal interest while only 6% availed it under influence of advertisement.
Table Factors influencing buying decisions
| Factors | Frequency | Percentage | |
| Decisions for choosing insurance | Company policy | 27 | 18 |
| Service quality | 21 | 14 | |
| Product quality | 18 | 12 | |
| Return on investment | 54 | 36 | |
| Other’s opinion | 30 | 20 | |
| Total | 150 | 100 | |
| Factors influencing buying decisions | Personal choice | 33 | 22 |
| On suggestion of friend | 17 | 11 | |
| Family | 34 | 23 | |
| Advisor | 36 | 24 | |
| Advertisement | 9 | 6 | |
| Total | 21 | 14 |
The results indicates the reasons for choosing the insurance facility. The most common reason for the respondents to choose insurance was for the purpose of earning investments. The statistics indicates that 36% participants availed insurance for earning returns on investment. Remaining 30% availed the option for tax avoidance, 24% availed the option for risk coverage of the family and 4% selected the facility for child welfare.
Table Reasons for choosing insurance policy
| Factors | Frequency | Percentage |
| Individual risk coverage | 9 | 6 |
| For tax avoidance | 45 | 30 |
| Return on investment | 54 | 36 |
| Risk coverage for family | 36 | 24 |
| Child welfare
Total |
6
150 |
4
100 |
The results also provide information about the nature of policy and company’s preference. The results depicts that majority of respondents (65%) selected the insurance policy that offered low risk, 23% availed the option for moderate risks and minimum return. Only 12% availed the facility of insurance for high risk and high return. The preferences of consumers also changed due to the type of company. Majority of respondents (81%) preferred the LIC for purchasing insurance policy while 19% relied on private companies.
Table Nature of policy
| Description | Frequency | Percentage | |
| Policy nature | Low risk | 98 | 65 |
| Moderate risk including minimum return | 34 | 23 | |
| High risk and high return | 18 | 12 | |
| Total | 150 | 100 | |
| Preference of company | LIC | 121 | 81 |
| Private companies | 29 | 19 | |
| Total | 150 | 100 |
The results indicates that the consumers had availed insurance against home security, car rental and life insurance. Results indicates that majority of the respondents (40%) currently availed the option of home insurance while 30% were planning to buy it. It further reveals that 50% respondents currently availed the facility of car insurance while 30% were planning to avail it in future. The results also indicates that 50% of the respondents availed the option of life insurance while 30% were planning to avail it.
Table 6 Type of insurance
| Type of insurance | Currently (%) | In past (%) | Planning to buy (%) | None (%) |
| Home insurance | 40% | 20% | 30% | 10% |
| Car rental insurance | 50% | 10% | 30% | 10% |
| Life insurance | 50% | 10% | 30% | 10% |
The results also reveals the factors that influence the purchase decision of the consumers regarding insurance. Majority of the respondents (70%) made insurance choice after considering the price while the decision of 30% was not influenced by price. The facts also responses that 60% of the respondents believed in saving while 40% were not involved in saving.
Table 7 Factors that influence decision
| Description | Yes | No | ||||||||||||||||||
| 1. Does price of insurance influence your decision? | 70% | 30% | ||||||||||||||||||
| 2. Will you buy insurance when it is cheaper? | 80% | 20% | ||||||||||||||||||
| 3. Do you save income? | 60% | 40% | ||||||||||||||||||
The answers obtained from the questionnaire also revealed information about the factors that consumers consider while making insurance decision. The results indicates that price remained the primary motivator for the consumers. Majority (70%) stated that their decision relies on the price of the policy while 30% mentioned that amount remained the deciding factor for them.
|
||||||||||||||||||||
Results further reveals that 70% of respondents were willing to avail insurance with offered discount of 5%. While 30% respondents were not willing to avail the option. Return on investment remained the central concern for the respondents to buy insurance as 70% availed it for earning returns while 30% respondents did not care about the returns.
Chapter# 5: Analysis
The findings of the study reveals that behavioral economics has close relevance with the life insurance. The behaviours and emotions of consumers have significant impact on their decisions regarding the purchase of insurance (Buzatu, 2013). The present study considers the demographic information of the consumers to uncover the impact of age, education and occupation on their insurance decisions. Consumer behavior is assessed to study its impact on the decision related to insurance. Irrational consumer behavior remains common element that affects the insurance related decisions of an individual. The results of the depicts that the decision of the consumers changed with age as most of the respondents availing insurance belonged to the middle age group. The results indicate that the young consumers are more inclined to invest in insurance (Ulbinaite, Kucinskiene, & Moullec, 2013). Rationality of decision is apparent as middle age group is more concerned about availing insurance who have longer expected lives compared to the older people (Kunreuther & Pauly, 2005).
The results of the research study also indicates that price remains the dominant factor in controlling the decisions of consumers. When participants are offered insurance with low prices they are willing to avail the option. Petra (2012) identifies, “rational people should behave effectively in order of the target, which they pursue at the time of selection, which specifically means that consumers want to maximize their benefit” (Petra, 2012). The dependence of consumers on price exhibits the rationality of their decision. The answer of the respondents to the discount option also reveals that price plays crucial role in the decision of consumers regarding insurance (Frank, 2011).
The results reveals that the factors influencing the decisions of consumers reflects the role of rationality. Blakcwell (2001) recognizes that, “activities commonly include; need recognition, information search, evaluation of alternatives, the building of purchase intention, and the act of purchasing, consumption and finally disposal” (Blackwell, R. et al, 2001). Insurance premium and coverage of loss also remains prominent factors influencing the decisions of consumers. Service quality remains prominent factor influencing the decision of the consumers regarding insurance purchase. Discount and insurance offered as company policy increases the probability of consumers to avail the option (Ravichandran, Bhargavi, & Kumar, 2010). Individuals reliance on the pricing for the decision of purchasing insurance reflects they role of rational behavior (Ulbinaite, Kucinskiene, & Moullec, 2013).
Interest rate influence the decisions of the consumers depicting that they are willing to avail the option when the interest rate in below 2%. The rationality of the consumers is visible in their decision of taking interest rate into account (Trevisan, 2016). The most visible reason for the participants of the study to choose insurance was for the purpose of earning returns. With the increase on the returns the consumers exhibited more willingness to avail the facility. The reliance of the consumers on returns depicts that they are more inclined to avoid the risks. The investments that individuals make is to gain profits or returns in future (Beckett, Hewer, & Howcroft, 2000). The results reveals that the incentive for majority of consumers behind insurance is to maximize their possibilities of earning gains in future (Virlics, 2013).
Rational decision of the consumers relies on the factors of coverage, price and the return on investment. The results obtained from the survey indicates that most of the consumers make decisions under economic behavious. The factors that influence the decisions of participants depicts the role of emotions in controlling decisions of the consumers (Avram et al, 2009). Emotions and personal choice influence the decisions of the consumers regarding insurance. Savings also affects the insurance related decisions of the consumers. The results depicts that majority of the respondents were engaged in monthly savings of 11-20%. The monthly investments of 11-20% indicates the role of savings. The concept of saving exhibits the rational choice of the consumers (Bechara et al. , 2006). Factors of risk and uncertainty influence the decisions of the consumers while most of the consumers focus on the returns on investment (Chaudhary, 2016). The decision of consumers after considering the price and discount depicts the role of deal effect (THALER, 1980). The anchoring effect is also visible in the insurance decision of the consumers as individuals use their prior knowledge of pricing to make decision (Trevisan, 2016). The heuristic approach is visible as consumer consider various options before making a decision regarding insurance purchase (Trevisan, 2016). The decline in the global industry trend of insurance exhibits the rational behaviors. The increased pricing of the insurance and low savings influence the decisions of the consumers (EY, 2017).
Chapter# 6: Conclusion
The study uncovers the relationship between behavioral economics and life insurance. The decision of consumers to invest in insurance relies on the concept of rationality. Emotions have crucial impact on controlling the behaviours of the consumers. Economic analysis of the consumers’ behavior relies on the factors that motivates them to buy a commodity. The theory does not restrict the evaluation to the predictive indicators in terms of choice and well-being. The present research used the descriptive study to assess the behaviours of induviduals towards insurance purchases. The survey method targeted 150 respondents including both males and females. Decision of consumers varied according to the age as consumers belonging to middle age group were willing to purchase insurance. Rational decision of the consumers relies on the factors of coverage, price and the return on investment. Discount and insurance offered as company policy increases the probability of consumers to avail the option.
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