Rudiments of insurance purchasing: a graphical state-claims analysis (original) (raw)
The Complexity of the Insurance Purchase Decision Making Process
Transformations in Business and Economics
Reaping the benefits of the rapid growth of the insurance markets, in particular in Asia, calls for improving the understanding of their respective consumers' expectations and behaviours. This paper presents an approach for modelling and analysing how consumers form their purchase decision for insurance services. Building upon fragmented insurance consumer behaviour works, we propose a model that consolidates and expands the current state-of-the-art. This model includes various consumers' characteristics such as life quality, exposure to risks, insurance culture and family nest filters, consumers' "intelligence", perception of need for security, need for insurance and affordability. Combined together, they model the consumers' inclination towards purchasing insurance. This is followed by a price-quality trade-off filter that leads to the specific product purchase decision; moreover, we propose a scheme that reflects the complexity of the selection process. ...
Insurance Pricing: from theory to reality
2010
Risk is an inevitable part of the world that can be found in different forms around us. We may be able to control the negative effect of some risks. But, insurance is an appropriate method that can be used for treating many different types of risks. Insurance pricing is a pivot in insurance industry as it is associated to all stakeholders. Insured, insurers and other stakeholders of the insurance industry follow up insurance pricing carefully. However, in most cases, the insurers implement insurance pricing. The price of insurance is normally a function of the cost of production. Unlike of many products, the costs of insurance products are not fixed and depend on a range of factors. In this paper, I have investigated the mechanisms by which these factors associate with insurance pricing. Then, I tried to identify drawbacks of these mechanisms.
Insurance and Insurance Markets
Handbook of the Economics of Risk and Uncertainty, 2014
Kenneth Arrow and Karl Borch published several important articles in the early 1960s that can be viewed as the beginning of modern economic analysis of insurance activity. This chapter reviews the main theoretical and empirical contributions in insurance economics since that time. The review begins with the role of utility, risk, and risk aversion in the insurance literature and then summarizes work on the demand for insurance, insurance and resource allocation, moral hazard, and adverse selection. It then turns to financial pricing models of insurance and to analyses of price volatility and underwriting cycles; insurance price regulation; insurance company capital adequacy and capital regulation; the development of insurance securitization and insurancelinked securities; and the efficiency, distribution, organizational form, and governance of insurance organizations.
Decision making under risk: applications to insurance purchasing
Advances in Consumer Research, 1992
The purpose of this paper is to provide an overview of psychological research on decision making under risk, with an emphasis on insurance behavior. This research approach has supplied many insights into how humans react to risk and uncertainty. These insights may help explain why people buy insurance in some circumstances and not others. For instance, decision research has shown that humans:
Determinants of Insurance Purchase Decision Making in Lithuania
Engineering Economics, 2013
This paper deals with the examination of insurance consumer behaviour in Lithuania. The purpose of the work is to determine the factors that explain the insurance service purchase decision of the Lithuanian citizens. To this end, a structured 5-point Likert scale questionnaire-based survey is employed to collect data. A research model composed of two main stages (purchase inclination and decision) is proposed. Factor analysis and multiple regression analysis are used to determine how the factors are formed and what their relative weights are. Five factors are identified: the acceptability of insurance conditions (F1), insurance service provider's competence (F2), consumers' monetary attitude towards insurance (F3), the positivity of consumers' insurance experience (F4), and the possibility to reduce the amount of premiums payable for insurance (F5). Subsequently, path analysis is applied to further refine the research model by eliminating the less significant relationships between the variables (the relationships between F5 and inclination, between F3 and decision, and between F4 and decision were eliminated). The refined model provides the revised impact weights of the variables on the consumers' decision to purchase insurance services: Decision = 0,192 F1 + 0,379 F2 + 0,156 F5 + 0,222 Inclination + e2, where e2 represents the possible impact of other variables. The results show that in Lithuania, insurance consumption decision making is still mostly influenced by monetary considerations such as consumers' evaluation of an insurance service in monetary terms and the search for the possibility to reduce the amount of premiums payable for insurance. The results also indicate that the demographical and socioeconomical characteristics of the consumers influence their behaviour. Among the main findings here are the most distinctive ones: men base their insurance decisions mostly on the acceptability of insurance conditions, whereas women do on the insurance service providers' competence; when purchasing insurance services, mature adults only care about the possibility to reduce the amount of premiums payable for insurance, while the youth and young adults mostly rely on the insurance service provider's competence; generally, for the Lithuanians a monthly amount of 800 LTL per person is the income level which enables them not only to form the inclination to purchase insurance services, but also to decide to purchase them actually; the higher degree or education acquired by the individuals, the fewer factors impact their insurance purchase decision: masters and doctors of science evaluate only the insurance service provider's competence, while bachelors, besides the insurer's competence, are also concerned with insurance service conditions and all the monetary issues; Vilnius' citizens evaluate a rather wider range of factors as compared to the individuals living in other places; individuals who are either married or living in a couple are more than singles inclined to purchase insurance services if an opportunity to reduce the amount of premiums payable for insurance exists; individuals who live alone are mostly concerned with the acceptability of insurance conditions, whereas families composed of two and more members highly focus on the insurer's competence; the decision of families with at least one child is determined by the insurer's competence, whereas families without children take a wider range of factors into account when making the insurance service purchase decision.
An Insurance Market Simulation With Both Adverse and Advantageous Selection
Risk management and insurance review, 2017
The theory of adverse selection predicts that high-risk individuals are more likely to buy insurance than low-risk individuals if asymmetric information regarding individuals' risk type is present in the market. The theory of advantageous selection predicts the opposite-a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom-based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands-on experience, and supplements current textbooks by bringing their content up to date with current research.
Choice of purchasing arrangements in insurance markets
Journal of Risk and Uncertainty, 1989
A simple dynamic model helps explain why risk-pooling purchasing arrangements evolved for health, disability, and term life insurance but not for property, automobile, or homeowners' insurance, and why whole-life policies typify life insurance purchased on an individual basis. We show that riskpooling purchases facilitate insurance against unpredictable changes in one's risk type, but such contracts prevail in competitive equilibrium only when the loss probabilities increase with age, as they do for health, disability, and life insurance. In contrast, when the loss probability declines with age (as it does for automobile insurance), then competitive equilibrium entails separating insurance contracts.
Usage-Based Insurance: the concept and study of available analyses
2017
Although insurance telematics may be a source of competitive advantage, the Usage-Based Insurance (UBI) is still an insufficiently explored area, especially in the context of the Polish insurance market. Accordingly, the main purpose of this paper is to facilitate a better understanding of the topic through a review and summary of selected literature and research achievements, which may prove useful in a discussion about domestic UBI. The paper presents both the historical perspective of UBI development and a summary of the research carried out over the last decade. It discusses the advancement of UBI tariffs and the successful modification of the applicable pricing schemes as well as points to issues that may hinder the market launch of Usage-Based Insurance. Finally, it attempts to present a structured view of definitions of various terms associated with telematics-based insurance.
The Role of Education on Consumer Behavior on the Insurance Market
Procedia - Social and Behavioral Sciences, 2012
Education has an extremely important role as it influences the insurance purchase decision. On the insurance market in Romani a, there is a discrepancy between the high potential demand and the rather low real demand. This discrepancy can be explained by a series of economic reasons, as well as by the lack of education in the field. Within more extended research regarding the d the factors influencing it, we have studied the way in which insurance services are perceived by potential clients and the role education plays in this.
Decision Making in Personal Insurance: Impact of Insurance Literacy
Sustainability, 2019
Financial illiteracy and underinsurance have been revealed to be critical issues in the financial sustainability and well-being of families. However, studies show that financial literacy does not necessarily translate to insurance literacy, and more specialized education can improve insurance literacy. Little is known about the impact of insurance illiteracy on the inclination to seek and retain insurance. Considering this gap, our study aimed to investigate the direct and indirect effect of consumers' insurance literacy on purchasing decisions of personal insurance. The study sample consists of middle-class consumers in Sri Lanka. A total of 300 valid questionnaires were collected and analyzed using a variance-based structural equation modeling. The results revealed that insurance literacy directly, and through its mediators of trust, perceived benefits, and favorable attitudes towards insurance, impacts the behavioral intention, significantly and positively. The cognition-based trust affected the purchase intention only through its mediators. Additionally, there is a significant difference between those who are having and not having insurance in terms of insurance literacy, trustfulness, and perceived value of insurance. This study is relatively a pioneer study, and findings will be of great interest to academicians and policymakers to encourage personal insurance as a tool in achieving financial security and well-being
Pricing insurance contracts — an economic viewpoint
Insurance: Mathematics and Economics, 1998
This paper presents a new approach for pricing insurance contracts, based both on economic and probabilistic arguments. The novel property of this approach is that it uses the demand for insurance to find the optimal premium an insurer should charge. Our approach stands in contrast to the standard loading factor methods used in actuarial science, where the number of insureds is constant regardless of the charged premium. The insurer maximizes its expected profit, defined as the difference between the expected net revenue from selling insurance contracts and the expected loss due to insolvency. We show how to find the expected-profit maximizing premium, Jr*, and its corresponding optimal number of insureds, n*. The first proposition presented in our paper identifies the premium (and number of insureds that minimize the expected loss due to insolvency). The second proposition gives, for a broad class of demand curves, sufficient conditions for the existence and uniqueness of an internal optimal solution. The third proposition asserts that, due to the suggested expected loss function, the insurer's objective function demonstrates economies to scale. Lastly, we provide a numerical solution for the case of a linear demand curve, giving the optimal premium and number of insureds. © 1998 Elsevier Science B.V. * Corresponding author. premium by a security loading factor. This loading factor is determined by aiming to a desired low probability of insolvency (cf. Bowers et al., 1986). Observe that the method presented in the actuarial literature assumes that the number of insureds is independent of the asked premium. In our model, however, there is an interplay between the offered premium and the number of insureds.
ANADOLU UNIVERSITY JOURNAL OF SCIENCE AND TECHNOLOGY A - Applied Sciences and Engineering
In this study, the demand for comprehensive insurance is analysed using utility theory and system simulation. A simulation study is performed to assess the behaviour of individuals with different income levels for the demand of comprehensive insurance. Simulation assumptions and input-output variables are determined using the real data set from a Turkish insurance company and the report about the insurance activities in Turkey for year 2014. The effects of income level, expected claim severity and premium level on the demand for insurance are investigated. It is concluded that while an increase in income level and expected claim severity causes an increase in the demand, an increase in premium level causes a decrease in demand.
Journal of Banking & Finance, 1997
The purchase of insurance provides a potentially finer informational partition over the distribution of post-loss resolution wealth that may allow favorable adaptation of intermediate consumption, investment, or other decisions. Such a positive informational 'value does not require consumer risk aversion. Lines of insurance with longer resolution periods should impact relatively more decisions and have higher informational value. Under standard assumptions on preferences, in the absence of informational value, risk premiums paid for insurance by risk averse consumers should not increase as the loss re-:solution period increases. Empirical tests using data from the property-liability insurance market suggest that the willingness to pay per dollar of coverage (as measured by relative market demand across lines of insurance) is greater for lines of insurance with longer re-:solution periods consistent with a positive informational value of insurance. The results suggest that other financial assets may also have differential informational value.
Background Uuncertainty and the Demand for Insurance against Insurable Risks
Theory suggests that people facing higher uninsurable background risk buy more insurance against other risks that are insurable. This proposition is supported by Italian cross-sectional data. It is shown that the probability of purchasing casualty insurance increases with earnings uncertainty. This finding is consistent with consumer preferences being characterised by decreasing absolute prudence.
2003
Risk Management and Insurance. Sharon S. Yang. Current Position. .Assistant Professor, Department of Business Mathematics, College of Business, Soochow University, Taipei, Taiwan. (August. 2004). Assistant Professor, Department ...