A Behavioral Study of Life Insurance Purchase Decisions

1 A Behavioral Study of Life Insurance Purchase Decisions A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy by Manohar Giri to the Department of Industrial and Management Engineering Indian Institute of Technology Kanpur March, 2018 Statement of Thesis Preparation 1. Thesis title: A Behavioral Study of Life Insurance Purchase Decisions 2. Degree for which the thesis is submitted: Doctor of Philosophy 3 Thesis Guide was referred to for preparing the thesis. 4. Specifications regarding thesis format have been closely followed. 5. The contents of the thesis have been organized based on the guidelines. 6. The thesis has been prepared without resorting to plagiarism. 7. All sources used have been cited appropriately. 8 The thesis has not been submitted elsewhere for a degree. Manohar Giri Roll No.

2 : 13114062 Industrial and Management Engineering Department IIT Kanpur CERTIFICATE It is certified that the work contained in the thesis titled A Behavioral Study of Life Insurance Purchase Decisions by Manohar Giri has been carried out under my supervision and that this work has not been submitted elsewhere for a degree* March, 2018 Dr. Devlina Chatterjee Assistant Professor Department of Industrial and Management Engineering Indian Institute of Technology, Kanpur i SYNOPSIS ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- ------------------------------ Name of Student Manohar Giri Roll no 13114062 Degree for which submitted Doctor of Philosophy Department Industrial and Management Engineering Thesis Title A Behavioral Study of Life Insurance Purchase Decisions

3 Name of Thesis Supervisor Dr. Devlina Chatterjee Month and year of thesis submission March, 2018 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- ------------------------------ The Insurance market in India is highly concentrated with the Life Insurance Corporation of India (LIC) having more than 70% of the market share. High levels of financial illiteracy lead to significant information asymmetry in the market. Many households lack access to the formal financial sector and do not have bank accounts. In this context, Insurance agents are often the only source of information. Insurance is often perceived as an alternative investment option even though the returns from this mode of investing may be less than optimal.

4 A 2014 Study estimated that the loss to the consumer from lapsed Insurance policies between the years of 2004 and 2011 was about $ 28 billion. Consumer choice in the Insurance sector has been studied extensively in the context of developed economies. Many of these studies assume that consumers make rational choices aiming to maximize their utility under wealth and information constraints. Risk minimization, bequest and investment motives often drive the demand for life Insurance . Several authors have noted examples of Insurance Purchase behavior that are inconsistent with models of rational choice. Behavioral models have been proposed to explain anomalies in consumer behavior that are not explained by the expected utility models. The aim of the current Study is to understand the Behavioral aspects of Insurance Purchase Decisions .

5 This thesis studies four different aspects of the Insurance market in India. First, we try to develop an econometric model for Insurance demand at household level. Second, we ii investigate how individual beliefs, attitudes and social norms affect Insurance Purchase Decisions . Third, we look at why individuals choose different types of policies, whether it is term, endowment or multiple policies, and whether this choice meets their individual needs or is led by social pressure. Finally, we look at the reasons that lead to lapsation of policies and whether this is related to the original motive for Insurance Purchase . The results from both the third and final chapters of this thesis are indicative of possible mis-selling of Insurance in India, where individuals may Purchase Insurance due to social pressures and aggressive selling tactics by Insurance agents.

6 In the first part of the thesis, we Study the determinants of household demand for life Insurance in India. A unique short panel dataset comprising of 34,855 households surveyed in the Indian Human Development Survey (IHDS) in 2004-05 and 2011-12 was used for this purpose. Socio-economic status, education level of the household head, asset ownership, family composition (households headed by women, family size and child birth) and initiation of a relationship with a bank had statistically significant effects on Purchase of life Insurance . The main difference among rural and urban households was that financial inclusion (in terms of loans availed and relationship with a bank) affected the former but not the latter. In the second part of the thesis, the objective was to understand how consumers arrive at the decision to Purchase life Insurance .

7 The theory of planned behavior (TPB) was the theoretical model used. Following this model, we were interested in seeing how beliefs, social norms, attitudes and perceived Behavioral control affect the Decisions to Purchase Insurance . A questionnaire was developed and primary data was collected from 386 respondents from 20 cities and 20 villages of UP, Rajasthan and Uttarakhand and other parts of the country. A structural equation modeling approach was used. Beliefs about Insurance and subjective norms were found to be inextricably linked with each other. These and perceived Behavioral control affected attitudes towards Insurance and attitudes in turn affected Purchase behavior. iii In the third part of the thesis, we wanted to understand how individuals made choices in terms of the kind of Insurance policy they Purchase .

8 From survey of the literature, we concluded that there was significant amount of mis-selling of life Insurance policies in India. Mis-selling was not only in terms of whether a person should buy Insurance but also what kind of policy he or she should Purchase . This was the motivation for this part of the Study . We wanted to understand the reasons for choosing different kinds of policies. We researched different motives that individuals had for purchasing Insurance including (i) tax saving, (ii) saving for future expenses, (iii) bequest for the family in case of untimely death and(iv) social motives such as influence of the Insurance agent or bank personnel. Tax savings motives were found to be positively related to the Purchase of term policies, while savings and bequest motives were positively related to the Purchase of endowment policies.

9 Social influence was the primary motive related to the Purchase of multiple policies. Finally, we investigated the reasons behind lapsation of policies. Lapsation of policies may be due to deterioration of financial conditions, or due to the original reason for Insurance Purchase becoming irrelevant, or due to the mis-selling of Insurance where the policy was purchased under social pressure. The question we tried to address was as follows: What were the original motives for Insurance Purchase for those policy holders, whose Insurance coverage lapsed. Insurance coverage of individuals who were less financially aware and those who were motivated because of social reasons were more likely to lapse within a few years, indicating that it may not have been needed in the first place. The findings indicate that in India's emerging economy many customers rely on advice from their agents when they decide to Purchase an Insurance policy.

10 Applying the theory of planned behavior, we find that subjective norms have a significant effect on the decision to Purchase Insurance . Social influence is also found to affect choice of policies. This may lead to suboptimal Decisions where customers may buy Insurance policies that do not address their financial needs. There is a need for greater education and awareness programs for consumers in this rapidly growing industry. iv Acknowledgements I have had the friendship and support of many people in my doctoral journey at IIT Kanpur. I take this opportunity to express my gratitude to all of them. First and foremost, I would like to express my sincere gratitude to my thesis supervisor Dr. Devlina Chatterjee for her continued moral support and guidance which led to the completion of the present work.