Academic journal article International Journal of Business and Society

The Effect of Consumer Factors and Firm Efficiency on Malaysian Life Insurance Expenditure

Academic journal article International Journal of Business and Society

The Effect of Consumer Factors and Firm Efficiency on Malaysian Life Insurance Expenditure

Article excerpt


Although Malaysia has been identified as one of the highest saving countries in the world, only about 6.5 millions, or less than 30 percent of its total population, are protected under life insurance. In other words, a large portion of the society is still at the risk of suffering a reduction living standard in the wake of sudden loss of property or personal misfortune. It is therefore crucial and timely to provide additional information regarding the issue to consumers and firms in the industry. The purpose of this study is two folded, firstly we investigate the factors contributing to individual purchasing behaviour of life insurance in the market; secondly we examine whether there is any relationship between the efficiency of insurance companies and the expenditure on life insurance. It is interesting to find out that the numbers of children in the households, the ages of the consumers and their income level significantly influence the expenditure on life insurance. The result obtained from the Data Envelopment Analysis (DEA) approach, on the other hand, shows that the expenditure is also closely linked to the efficiency of the insurance companies in the country.

Keywords: Life Insurance, Consumer Factors, Probit Model, DEA, Efficiency

(ProQuest: ... denotes formulae omitted.)


Life insurance is a form of saving which has remained largely untapped in Malaysia. It is a market with a huge potential, which has much room for explorations and developments. To date, there appears to be rather little prior published work in the area of life insurance demand analysis in Malaysia and this study is expected to be an important contribution to the literature.

Viewed in simple terms, life insurance is a pooling arrangement used by a group of policyholders to accumulate a fund that pays a stated benefit at the death of each member. The fund itself, as well as any additions or subtractions (which are resulted from premium payments, interest earnings or death benefits) is allocated equally among the surviving members of the group. The demand for pure life insurance exists as individuals are uncertain about the date of their death and do not want to run the risk of dying without leaving enough provision for dependents. Therefore, the aim of purchasing life insurance is to maximise the utility and to offer a bequest for surviving individuals (spouse and dependents) who are risk averse to any potential loss of income from the "bread-winner".

Undeniably, life insurance is able to satisfy two motives for saving; the general motive of saving is for retirement, and a second motive of saving for a bequest. According to Yaari's life insurance demand model matrix (1965), there are two models dealing with the latter motive. The first model is Fisherian model, without a bequest motive, which explains the role of life insurance to improve the opportunities for borrowing, and thereby expanding the set of possible consumption plans. The second, Marshallian model, with a bequest motive, the more risk adverse an individual is, the more insurance he or she purchases, ceteris paribus.

However, each person's key motives to demand life insurance will differ, which are dependent on a variety of variables. Hammond et al. (1968), Ferber and Lee (1980), Browne and Kim (1993) and Halek and Eisenhauer (2001) found that at the margin, education increased one's aversion to pure risk. On the other hand, it also increased one's willingness to accept a speculative risk. They identified that there were significant relationship in which purely demographic variables such as age, gender and marital status affected an individual's degree of risk aversion, and thus demand for life insurance.

Truett and Truett (1990) and Gandolfi and Miners (1996) used the method of maximum likelihood to estimate the life insurance demand model and discovered that the higher a household's income, the greater the life insurance consumption. …

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