The financial behaviors that leave us underinsured

The effects of underinsurance in some areas of provision are felt from India, where only 17 per cent of people are estimated to have health insurance, despite the fact that the government has identified the cost of healthcare as a major cause of poverty¹, to Australia, where only four per cent of those with dependent children are believed to have adequate levels of life insurance cover².

Feelings about the price of insurance are often cited as the main reason. However, there are behavioral factors too. No one likes thinking about the bad things that might occur in their lives, and that could prevent them making provision for such eventualities. Research shows that many people in Europe underestimate the likelihood of something going wrong, and therefore fail to do enough to protect themselves and their families financially³.

Degrees of financial literacy

Some countries have more of a problem with underinsurance than others, an issue that appears to be grounded in differing levels of national financial literacy and comfort with risk, rather than the ability to afford protection.

Efforts to strengthen financial literacy will help consumers play an active role in identifying areas where they are not well protected.

The Organisation for Economic Co-operation and Development (OECD) believes that increased financial education will make consumers more likely to realistically assess risk levels and take appropriate steps. Rintaro Tamaki, Deputy Secretary-General of the OECD, opened a financial well-being symposium in September 2015 by stating: “Efforts to strengthen financial literacy will help consumers play an active role in identifying areas where they are not well protected.”⁴ Its working definition of financial literacy is “a combination of awareness, knowledge, skill, attitude and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing”.

Protecting income

A new study from Zurich Insurance Group, in conjunction with Oxford University's Smith School of Enterprise and the Environment, identifies one of these areas as income protection. It says there is a "serious, growing gap between supply of and demand for income protection" around the world. It defines this "Income Protection Gap" as the reduction in household income as a consequence of the death or incapacitation of an adult wage earner on whom the household relies, taking all public and private sources of replacement income into account.

Looking at Continental Europe, the Anglo-Saxon world, Latin America and South-East Asia including India, the report found that governments have "shifted some protection responsibilities onto private schemes but in general their uptake has been insufficient to fill the gap owing to misperceptions of risk and the legacy of mostly generous government provisions".

National differences

In addition to this analytical report, Zurich conducted a survey of 6,000 people in Germany, Ireland, Italy, Spain, Switzerland and the UK to find out people’s perceptions and awareness of income protection. The survey found that Germans are most aware of the possibility of insuring their income, with 47 per cent knowing about income protection. They also have the highest savings buffers to protect them if something goes wrong. In Spain, where only 17 per cent of people are aware of income protection possibilities, the average savings buffer will last less than half as long (3.3 years against 6.8 years).

Despite this imbalance, the Zurich study showed that Germans are the least likely to believe that they are doing enough to protect themselves, should they become unable to work. Three-quarters of those surveyed believe their protection and savings are adequate, compared with just two-thirds of Germans.

OECD research shows a wide variance between countries in both financial literacy and attitude.

The OECD’s own research backs up Zurich’s findings that Germans are particularly risk averse in their approach to personal finance, and shows a wide variance between countries in both financial literacy and attitude. An OECD pilot study into adult financial literacy in 14 countries indicated that Germans were the least likely to borrow to make ends meet, the most likely to save, and the most likely to pay bills on time.

Peruvians were also revealed as financially cautious, with 71 per cent setting financial goals and striving to achieve them, and 91 per cent carefully considering purchases – suggesting that financial risk-aversion is not limited to nations with a high level of GDP. Malaysians were revealed to be active savers who carefully thought about their purchases, yet only 3 per cent of those surveyed said they had chosen a financial product after shopping around and taking independent guidance.

Perhaps unsurprisingly, the OECD concluded that there is a positive association between financial knowledge and good financial behavior in each country – the more we know about our finances, the more likely we are to make good financial decisions.

Age is a factor in financial behavior

The OECD research also revealed that middle-aged people are more likely to exhibit good financial behavior in conjunction with good financial knowledge. The young, it concluded, did not yet know enough to make good decisions, while the old “may find it difficult to keep up with the fast pace of change in the financial market place, including the introduction of new technologies.” The respondents with the highest scores for sound financial behavior, attitude and literacy are most likely to be aged between 30 and 60.

However a recent US survey suggested that financial confidence increases with age. Seventy per cent of those aged over 65 graded themselves A or B for financial knowledge compared with 54 per cent of millennials.

A long road

In short, there is no single reason why we don’t move to protect our income. A variety of factors, like cost, financial literacy, risk appetite and good financial attitude, mean that the people in some countries are more likely to prioritize protection and savings than others. Age matters too.

Financial education, as championed by the OECD, may be the best way to ensure that customers understand the financial risks they face, and balance the wide discrepancy in financial literacy and protection between countries.

Key takeaways

• Underinsurance is a global issue, with some countries more affected than others.
• A new report from Zurich Insurance Group, in conjunction with Oxford University's Smith School of Enterprise and the Environment, says there is a "serious, growing gap between supply of and demand for income protection" around the world.
• Financial literacy and attitudes to risk vary by country.
• Better financial education can help people make better decisions.
• Those aged between 30 and 60 are most likely to have a more sophisticated approach to their financial behavior.
• The OECD is keen for financial literacy to expand in all countries and across all age groups.
  
  

Underinsurance is a global problem grounded in differing national levels of financial literacy and attitudes to risk.

¹ https://www.thehindu.com/news/national/only-17-have-health-insurance-cover/article6713952.ece 
² http://www.lifewise.org.au/about/underinsurance-a-problem-in-australia 
³ https://www.zurich.com/en/media/news-releases/2015/2015-0824-01 
⁴ http://www.oecd.org/daf/fin/financial-education/FE-Malaysia-2015-Opening-Remarks.pdf