FACTORS AFFECTING INDIVIDUAL LIFE

INSURANCE OWNERSHIP, A STUDY OF PENANG

TANLAILAI

UNIVERSITI SAINS MALAYSIA

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 FACTORS AFFECTING INDIVIDUAL LIFE INSURANCE
OWNERSHIP, A STUDY OF PENANG RESIDENTS

by

TANLAILAI

Research report submitted in partial fulfillment of the requirements

MAY2000
 Specially dedicated to:

My beloved wife, Oh Saw Y ong and our

11
 ACKNOWLEDGEMENT

I am greatly indebted to my supervisor, Dr. Nasser Noor for the successful completion

of this thesis. His excellent tutoring, guidance and endless encouragement and

invaluable advice in all aspects were inspiration throughout this study.

I would also like to record my appreciation to my beloved wife, Oh Saw Yong for her

supports, patience and sacrifices which made it possible to undertake this MBA

program.

iii
 TABLE OF CONTENTS

TITLE

DEDICATION ii

ACKNOWLEDGEMENT iii

TABLE OF CONTENTS tv

LIST OFT ABLES vii

LIST OF FIGURE vn

ABSTRAK viii

ABSTRACT IX

Chapter 1: INTRODUCTION

1.0 Introduction 1

1.1 The Development of Life Insurance Industry in Malaysia 3

1.2 Research Problem 5

1.3 Research Objectives 6

1.4 Significance of Study 6

1.5 Research Scope 7

Chapter 2: LITERATURE REVIEW

2.0 Individual Life Insurance Ownership 8

2.0.1 Definition of Individual Life Insurance Ownership 8

2.0.2 Dimensions of Individual Life Insurance Ownership 8

2.1 Factors Affecting Individual Life Insurance Ownership 9

2.1.1 The Demographic Factors 9

2.1.2 The Perceptions of Life Insurance Benefits 12

2.1.3 The Attitude towards Individual Personal Risk 16

iv
Chapter 3: RESEARCH FRAMEWORK AND METHODOLOGY

3.0 Research Framework 18

3.1 Definition of Variables 19

3.1.1 Individual Life Insurance Ownership 19

3.1.2 The demographic variables 19

3.1.3 The perception of life insurance benefits 19

3.1.4 The Attitude towards Personal Risks 20

3.2 Development of Hypotheses 20

3.3 Research Design 20

3.3.1 Type of Study 20

3.3.2 Nature of Study 21

3.3.3 Study Setting 21

3.3.4 Unit of Analysis 21

3.3.5 Population and Sample 21

3.4 Questionnaire Design 22

3.5 Data Collection Method 22

3.6 Data Analysis 23

Chapter 4: RESEARCH FINDINGS

4.1 The Sample Characteristics 25

4.2 Reliability of Measures 27

4.3 The Relationship between Demographic Variables with Individual Life

Insurance Ownership 28

4.3.1 Gender 28

4.3.2 Ethnicity 28

4.3.3 Age 28

y
 4.3.4 Income 29

4.4 The Relationship between Perception of Life Insurance Benefits with

Individual Life Insurance Ownership 29

4.5 The Relationship between Attitude of Personal Risks with Individual Life

Insurance Ownership 29

4.6 The Relationship between the Educational Level with the Perception of

Life Insurance Benefits 30

Chapter 5: DISCUSSION AND CONCLUSION

5.1 The Effect of Demographic Variables 32

5.2 The Effect of Life Insurance Benefits Perceptions on Individual Life

Insurance Ownership 34

5.3 The Effect of Individual Attitude towards Personal Risks on Individual

Life Insurance Ownership. 35

5.4 Implications of Study 36

5.5 Limitations of Study 38

5.6 Suggestions For Future Research 39

5.7 Conclusions 39

BIBLIOGRAPHY 41

APPENDIX: -SPSS output 44

Questionnaire

VI
 LIST OF TABLES

Table 4.1 Sample Characteristics 26

Table 4.2 The Cronbach' s Alpha Values 27

Table 4.3 Summary of findings 31

Table 5.1 Comparison with other researchers' findings 36

LIST OF FUGURE

Figure 3.1 Research Model 18

vii
 ABSTRAK

Kajian ini meninjau bagaimana umur, pendapatan, jantina, bangsa, persepsi terhadap

faedah insuran hayat dan pandangan terhadap risiko persendirian mempengaruhi

pemilikan insuran hayat. Perhubungan di antara tahap pendidikan dengan persepsi

terhadap faedah insuran hayat juga diuji. Kaedah persampelan mudah telah digunakan

dan sebanyak 247 calon dari seluruh Pulau Pinang telah menyertai kajian ini.

Hasil empirik dari kajian ini menunjukkan bahawa lelaki, ethnik bukan Melayu,

gulungan pendapatan tinggi dan mereka yang berumur melebihi 35 tahun memiliki

insuran hayat yang lebih banyak. Di samping itu, persepsi terhadap faedah insuran

hayat and pandangan terhadap risiko persendirian juga mempengaruhi tahap

pemilikan insuran hayat. Tambahan pula, tahap pendidikan juga didapati

mempengaruhi persepsi terhadap faedah insurance hayat.

VIII
 ABSTRACT

This study examines how age, income, gender, ethnicity, perception of life insurance

benefits and attitude towards personal risk affects the individual life insurance

ownership. The relationship between education level with the perception of life

insurance benefits was also studied. The convenient sampling method was deployed

and 247 respondents around the Penang Island responded.

The findings of this study provides empirical evidence that male, non-Malay, higher

income group and those age above thirty five years old own significantly higher life

insurance. The perception of life insurance benefits and attitude towards personal risk

were also found to be affecting the magnitude of life insurance ownership. In addition,

the education level was found to be affecting individual perception of life insurance

benefits.

IX
 Chapter 1

INTRODUCTION

1.0 Introduction

Insurance is one of the most interesting and important transactions engaged in by

individual and business firms. Almost every aspect of the transaction is of sufficient

interest for review and thought. As defined by Dorfman (1987), "Legally, insurance

is a contractual arrangement one party agrees to compensate another party for losses."

The party agreeing to pay the losses is called the insurer while the party who will

receive the payment for a loss is called the insured. The payment the insurer receives

is called a premium and the insurance contract is termed as policy. Specifically, life

insurance may be defined as one " who secures the payment of an agreed sum of

money on the happening of contingency or of a variety of contingencies, dependent

on a human life" (Huam, 1999).

According to Rispler (1985), marine insurance is believed to be the first type of

insurance known to world civilization. The earliest life insurance policy of which any

known record exists was dated back in June 18, 1583 in England. It provided the

insurance upon the life of William Gybbons for a period of 12 months from the date

of underwriting (Beadles, 1973).

The basic principle of life insurance is that human life has an economic value. This

value is closely associated to the individual's ability to generate financial income. The

purchase of life insurance, in general, is aimed towards providing financial security

against premature death, disability, forced retirement, and one exhausting financial

assets. However, life insurance should not be purchased of indemnity for this
economic value. It should be purchased to meet specific needs that could not be

covered by other assets if death were to occur immediately. Two distinctive elements

that form the foundation of life insurance are the human life value definition and the

established mortality table. The human life value may be defined quantitatively as the

capitalized value of net future earning of an individual. It plays important roles in the

compensation analysis in the event of wrongful death lawsuits. On the other hand, the

mortality table is the bridge that closes the gap between the sum insured and the

amount of premium required. This cross-reference set a standard for the life insurance

industry and avoided the subjective and discretionary judgement to premium versus

sums insured relationship. The earliest mortality table was compiled in 1693 by Hally.

In those early years, the inferior natural premium system was commonly used.

(Huam, 1999) The level premium system, an improved version to calculate the

premium rate was conceptualized and deployed to the field in 1755. (Lee, 1987) This

system was further refined through historical data analysis of insured and the

mathematical techniques, resulting in a more accurate relationship.

The Equitable Society will issue the life insurance policies based on the following

principles:

• Coverage is available to anyone who satisfied the initial health requirements and

continues to pay the contractual premium.

• Once accepted for insurance, further proof of continuing good health is not

required.

• Level premium is determined at entry and must be paid through the term of

contract.

• Extra premium is chargeable for special occupational and substandard health

risks.

2
1.1 The Development of Life Insurance Industry in Malaysia

The life insurance business was first introduced to Malaysia during the 18th.

Century. The British East India Company and their merchants were responsible for

sowing the insurance seed in Malaysia. Initially, this facility was owned and managed

by the British to protect their merchandise. There was negligible local participant due

to ignorance and lack of expertise (Huam, 1999). The actual wave that hits Malaysia

began back in late 1940s and early 1950s, after the World War II. Dominated both by

the British and American through their locally incorporated wings. By 1999, there

were 48 foreign branches operating in Malaysia. Pressured by the nationalistic

sentiments and the Government requirement, the 48 foreign insurers have restructured

to become 37 locally incorporated Malaysia insurers (BNM, 1999). In the last two

decades, there has been some fundamental changes in the landscape of The Malaysian

insurance industry, a few notable one are listed below:

• 48 foreign branches of insurers have restructured to become 37 locally

incorporated Malaysian insurers.

• The legislative framework revamped with the enactment of Insurance Act 1996,

which substantially strengthened the regulatory regime in Malaysia. The key

highlights were the reinstatement of the higher capital and solvency margin

requirements for insurance companies.

• A true Islamic insurance or Takaful was introduced to the Malaysian community

in 1984.

• The admission of foreign reinsures in 1993.

• The underwriting agencies and representative offices were phased out in 1991 and

1993 respectively to promote greater commitment and professionalism.

• With the advent of bancassurance, cross selling of financial products has

proliferated in the financial institutions.

3
• In line with the advancement of e-Technology, e-commerce in the marketing

strategies and operating procedure has begun to revolutionize the insurance

industry.

In his speech on 201h August 1999 during the 1999 Malaysia Insurance Institute

Annual dinner, the Minister of Finance II has posted the following comments and

advice:

• The industry remains fragmented in all sectors, not very different structurally from

the landscape ten years ago. Also noted was the domestic institutions are still

lagging behind their foreign counterparts in terms of efficiency, productivity,

innovation, customer service as well as market reach.

• The industry was urged to make corresponding intrinsic changes in response to

external forces. It must strengthen itself financially, strategically and

competitively.

• Malaysia insurance industry is intrinsically small but sound. A consolidation will

definitely benefit it. This is not an option and must be done urgently!

• The industry cannot and should not be sheltered indefinitely by the government. It

must enhance competitiveness and compete in the global arena.

• Consolidation for financial strength s~ould be the primary strategy for the future

growth of the life insurance industry. Insurers, brokers and adjusters were asked to

refocus their energies and resources on achieving the critical success factors that

can make or break their business.

• Knowledge is the most important commodity in a service-based insurance

industry. A structured industry-wide training ts vital in the competitive

environment of the 21 51 century.

4
• The industry must also continue to improve its public image. It should embrace

itself in the wave of technology and intellectual property advancement to ensure

future success.

1.2 Research Problem

In line with the strong economic growth in the 1990s, the Malaysia life

insurance industry has been growing at an accelerated pace, achieving double digit

growth rate from 1994 onwards. The total Whole Life Insurance Premium Paid

increased from RM 1,576.7 million in 1990 to RM 6,201.2 million in 1998, almost

four times. In parallel the number of registered Life Insurance agents have also

increased from 37,373 to 88,764 for the corresponding period. ("Malaysian Life

Insurance Key Indicators Chart", Jan. 141h.2000. Life Insurance Association of

Malaysia [LIAM, http://www .liam.org.my] ). However the Asian financial crisis

which erupted in 1997/98 had adversely affected the financial sector. The life

insurance industry has shown signs of slowdown. It recorded a combined premium

income of RM 5.2 billion for the first half of 1998, a marginal increase of 3.4%

compared with 19.3% for the comparable period in 1997. For the first nine months of

1998, both new premium and new sums insured of life insurance business decreased

by 11.8% and 9.4% respectively. All categories of policies registered negative growth

in new business premiums. (Bank Negara Malaysia, 1998) The life insurance

companies were asked to control commission and management expenses in order to

maintain the underwriting margin. At the same time, the lucrative income from the

insurance industry has attracted a lot of talented professionals to join the force and

created intense competition amongst the agents. Securing a Life Insurance Policy is

not as simple anymore and the cost incurred has risen from year to year (Press, 1997).

5
In view of the crucial and competitive market environment in the life insurance

industry, it is timely to carry out this research that studies the relationship between

demographic factors, attitude towards personal risks and life insurance benefits and

see how they affect the individual life insurance ownership in Penang. The conclusion

generated from this study, in addition to the traditional underwriting criteria, can be

used to segment, target, promote and develop the markets with greater precision

resulting in higher efficiency and lower cost per policy.

1.3 Research Objectives

The objective of this study is to determine how demography, perception of life

insurance benefits and attitude towards personal risk affect the magnitude of

consumers' life insurance ownership. This research also aimed to establish the

relationship between education level with the perception of life insurance benefits.

The results from this study will be able to identify a set of demographic factors, how

perceptions of life insurance benefits and attitude towards personal risk affect

individual life insurance ownership. Besides, the way education level affects

individual perception of life insurance benefits will also be discovered. This

information can be used by the life insurance companies to segment, target, promote

and develop their overall market with greater precision resulting in higher efficiency.

1.4 Significance of Study

The outcome of this study will be able to offer some insights into the

demographic factors affecting Penang residents' life insurance ownership. This

information can help the insurers to segment, target, develop, and promote their

market resulting in a higher growth and efficiency. Also, assuming there is a positive

relationship between the attitude towards personal risks and life insurance benefits

6
with individual life insurance ownership, the information can be used to promote

potential market through training and awareness campaign. In short, this research is

hoped to generate some beneficial findings that will add value to the Malaysia Life

Insurance Industries.

1.5 Research Scope

This study is to be carried out within Penang Island only. It will only cover the

demographic factors, attitude towards personal risks and perception of life insurance

benefits as the factors affecting individual life insurance ownership. Other unknown

factors that may potentially impact one's life insurance ownership will not be

discussed as this study is strictly based on evidence surfaced during literature review.

7
 Chapter2

LITERATURE REVIEW

Searches on factors affecting individual life insurance ownership in The Malaysia

context have provided very little insight, both conceptually and empirically. Only a

limited published and unpublished materials were discovered in this subject.

However, there were quite a number of published and unpublished papers available

outside the country.

In reviewing the literature, this chapter will concentrate on the definitions and

dimensions of individual life insurance ownership. In addition, the factors affecting

their ownership will also be reviewed.

2.0 Individual Life Insurance Ownership

2.0.1 Definition of Individual Life Insurance Ownership

In the field of life insurance marketing and research, the life insurance

ownership could be one of the most prominent criterion variables. The construct is

perhaps even more significant and important in the sales and marketing sector, given

that its' magnitude is a direct indication of the agent's performance.

2.0.2 Dimensions of Individual Life Insurance Ownership

There are many dimensions in which the individual life insurance ownership can

be measured. The amount of cash benefits purchased upon maturity, death and

disability, the number of policies in force and the absolute amount of annual premium

paid are three ofthe more common ones. Gandolfi and Miners (1996) in their research

in gender-based differences in life insurance ownership used the benefits purchased in

8
their research. Lim (1996) has used annual life insurance premiums collected in the

previous year and persistency ratio obtained by the insurance agents as the dimensions

of the performance of life insurance agents, this has a direct correlation with the

ownership. Huam (1999) used the first year premium collected in accounting year

1998 in his study to determine factors influencing life insurance agents' job

performance. Biggs (1983) used the percentage of each year's income as ownership in

his study for the demand for life insurance in the American society. In this study, the

annual life insurance premium paid by each individual is the definition of their

ownership.

2.1 Factors Affecting Individual Life Insurance Ownership

The life insurance sales forces have always tried to understand the various factors

that affect individual life insurance ownership. In response to this interest, individual

researchers and prominent life insurance research association such as LIFE

INSURANCE MARKETING RESEARCH ASSOCIATION (LIMRA) have

examined the many possible determinants of individual life insurance ownership.

In general, these studies have provided some generic insights for the reason of

purchases, especially from the social economic and demographic angle. In addition,

the perception of life insurance benefits and attitude towards personal risks are

believed to be impacting the ownership of life insurance.

2.1.1 The Demographic Factors

With the demographic change of an aging population, growing longevity,

increased literacy and education level that promotes awareness, higher per capita

income, changing marriage profile and number of dependant, increase in working

9
women population and other cultural evolution in Malaysia, the demand for life

insurance is going to change significantly. The demographic factors will certainly

play a crucial role in determining the shift in life insurance ownership in Penang. This

has been evident in most of the developed countries, particularly in the United States

of America. (U.S.A.)

LIMRA and Life Insurance Association Malaysia (LIAM) joint study on "Consumers'

Attitude and Their Buying Habit Survey" carried out in September 1996 found out

that the Chinese possess the highest percentage of life insurance in Malaysia, follow

by Indian and Malay in descending order.

In their study on "Gender-Based Differences in Life Insurance Ownership", (Gandolfi

and Miners, 1996) have indicated that there are meaningful differences between

husbands and wives in their demand for life insurance functions. Although money

income is the most significant determinant of life insurance holdings for both

husbands and wives, there is evidence that contributions to household production also

influence the purchase of life insurance. Their empirical results showed that full-time

working wives in The U.S.A. had 48 percent as much life insurance as their husbands

and nonworking wives had 15 percent as much.

Lewis's (1989) study of life insurance demand revealed that "a breadwinner's demand

for life insurance depends on the demographic structure of his or her household".

Lewis also extended Yaari's (1965) life-cycle model with uncertain lifetime where a

consumer purchases life insurance to increase his expected lifetime utility. His

empirical analysis finds household income and number of children to be positively

related to life insurance ownership of the husband and also finds ages of the offspring

10
to be important. According to the results obtained from the estimation of various

models using the premium expenditure measure, Kim (1992) concluded that

household income is one of the three factor variables that affect social and life

insurance demand.

Retzloff (1993) in his study on "Trends in U.S. life insurance ownership" conducted

jointly with the American Council of Life Insurance (ACLI) and the Million Dollar

Round Table (MDRT) discovered that young singles (never-married), young couples,

and young parents account for 44 percent of the total U.S.A. life insurance market.

Their need for and likelihood of having life insurance also varies by lifestage. Young

singles are less likely than other young households to have any life insurance

coverage. While the gap between the likelihood of men and women having coverage

continues to narrow, women are still less likely than men to have either individual or

group coverage.

Burnett and Palmer (1984) find that "owners of large amounts of life insurance are

better educated and have larger families". Truett (1990) found that age, education, and

level of income are factors that affect the demand for life insurance". Sheehan's

(1997) analysis suggested two consumer characteristics: gender and household

income, and two behaviors: seeking information and using cost-related information,

as impacting consumer knowledge that leads to Life Insurance purchase. Harby

(1985) concluded that the most important explanatory variable for the amount of life

insurance purchased is current income.

Rispler (1986) mentioned that Muslim religious scholars are still continuing to debate

whether Islam and insurance can coexist. Saleh (1996) and Azmi (1997) suggested

ll
that the prohibition of conventional life insurance in the Muslim community could be

due to "Riba" and "Gharar" which represent "Unjustified profit" and "Uncertainty of

counter value". This can pose a significant difference in life insurance ownership

among Muslim and Non-Muslim.

In a study using ordinary least squares, Ferber and Lee (1980) stated that the life

insurance purchase decision is influenced by home ownership, and by the husband's

education. In discussing a household's intensity for bequests, which is positively

related to its demand for life insurance, Campbell (1980) says that this intensity "is

likely to be a function of the age and number of dependents in the household [and]

their future need of economic support".

Goldsmith (1983) does take the wife's human capital accumulation into account in

determining purchases of life insurance on the husband. He included the wife's labor

force participation and her education level, as well as the impact of household size on

term life insurance purchases on the husband. Daily ( 1994) in his study on "The

Demand for Life Insurance in Mexico and the United States" concluded that age,

education and level of income affect the demand for life insurance in Mexico and the

U.S.A. He also mentioned that income elasticity of demand for life insurance is much

higher in Mexico than in the U.S.A.

2.1.2 The Perceptions of Life Insurance Benefits

According to the definition of Oxford Advanced Leamer's Dictionary of

Current English edited by Crowther (1998), "Perception is a way of seeing,

understanding or interpreting something". In this study, the perception of life

insurance benefits means the way the respondents interpret and agree to the stipulated

12
benefits that include financial protection against disability to work, saving, investment

return, retirement funding, medical expenses coverage, children's educational

funding, social status projection and the way to express love to family members.

Three broad categories for the use of life insurance are protection, financing and

investment. Death, disability, health problems, or casualties can drastically reduce or

eliminate earning power. Taxes and other bills can become so great that those

personal assets and employed capital may have to be liquidated to the extent an

individual may never recover from its financial effects. Hence Life insurance can be

an extremely important component of one's financial planning. The amount

purchased should be adequate to fund a readjustment period of several years for

surviving dependants if the principal breadwinner dies. In view of the many

prevailing advantages, consumers' perception of life insurance benefits will definitely

play a vital role in deciding life insurance ownership.

LIMRA & LIAM (1996) joint study on " Consumers' Attitude and Their Buying

Habit Survey" revealed that, in general most Malaysian believe that life insurance is

of good value and a good form of long term savings. They also agreed that people

should have life insurance if they can afford it. ACLI (1993) studies show that fewer

consumers today feel that most people should have life coverage and fewer think that

life insurance is the best way to financially protect one's family against the death of

the breadwinner. This decline in the proportion of the public rating life insurance as

necessary and as the best protection vehicle has occurred because more people say it

is unnecessary or inappropriate. This is a clear indication that perception towards life

insurance benefits will determine the need to have it.

13
Retzloff (1993) revealed that young parents were especially interested in developing a

plan to save money for their children's education. They are also more interested in

disability income plans. In his study on " A means to fund college costs", Kistner

(1996) found out that cash-value life insurance policy is a good way to fund children's

college tuition cost and it has attracted a lot of clients, especially the young married

couple with kids. Michael E. Callahan (1995), President-elect of the American

Society of Pension Actuaries suggested life insurance could be used in many ways to

assist in solving business problems related to retirement issues. This factor alone is

believed to have attracted a vast number of policy owners in the U.S.A.

Barney ( 1999) revealed that "With the demographic change of an aging population,

growing longevity and a move from defined benefit plans to defined contribution

plans, there's a lot of concern about retirement". This has made the living benefits an

attractive feature in the list of life insurance benefits. People don't have to wait until

their death or disability to withdraw their benefits. Scott (1995) noted that life

insurance can be an extremely important component of one's financial planning. Life

insurance is an excellent investment that buys time needed to build wealth and to earn

cash reserves. A permanent life insurance policy-can be one way to diversify a portion

of a family's wealth. Life insurance can be owned outside the taxable estate, which

offers a tremendous financial benefit.

Screws ( 1994) in his article, "Life insurance and the power of Love" shared with the

American public how he was able to live through and see his quadruplets born, six

months before he dies of cancer. His life insurance also helped to bring up his babies.

Daily (1992) in his article, "Life Insurance Sense and Nonsense" believed that three

broad categories for the use of life insurance are protection, financing, and

14
investment. Owens (1999) quoted that nothing can reduce the emotional loss of a

person's untimely death, having one's life adequately insured can reduce the risk of

financial loss. Barry and Poynter (1998) suggested that life insurance can be used to

cover disability, sickness or injury, retirement as well as premature death.

According to the excerpted book Talking Dollars Making Sense, by Brooke Stephens

(1997), "If African Americans are going to build firm financial foundations for their

families, a life insurance policy is the best way to prevent financial ruin for a

succeeding generation". Shoemaker (1999) found that many Americans also invest in

variable annuities in life insurance to supplement their retirement income.

"We protect ourselves against dying but not against losing our greatest asset -- our

earning potential. To put it bluntly, when you die, you no longer have expenses. When

you're disabled, you still have living expenses, now compounded by medical

expenses. You've got rent or a mortgage to pay, food, car, utilities, and perhaps your

children's college tuition." Quoted Lacerte (1999) in his article titled " Disability

coverage becomes a more important benefit"

These various perceived life insurance benefits are believed to be the major driving

force towards the growing life insurance market in the world. With no exception,

Penang is expected to experience the same wave in her journey to growing life

insurance business. Also, during my literature search, there isn't a known study that

directly relates the individual perception towards life insurance benefits and their life

insurance ownership. With the assumption that many people purchase life insurance

based on the benefits stipulated above, I believe that there should be a relationship

15
between their perception of life insurance benefits with the magnitude of their life

insurance ownership.

2.1.3 The Attitude Towards Individual Personal Risk

Attitude is defined as " A way of thinking about or behaving towards

something" by the same dictionary quoted in section 2.1.2. In this study, it is

interpreted as the way the respondents think about how risky they are in relation to all

the personal risks. The concept of "risk" became popular in the field of economics in

the 1920s (Knight, 1921). Since then, it has been successfully used in the theories of

decision making in economics, finance and decision science. Bauer (1960) introduced

the concept of "perceived risk" to the marketing literature and then the psychologist

Kogan and Wallach (1964) wrote their major work on risk taking. Dowling & Staelin

(1994) defined risk as the uncertainty on the consequences of a decision or action.

Miller & Baumwald (1987) defined the personal risk as the possibility that an

individual will not achieve financial goals for one of the following reasons, i.e. Death,

disability, health problems and casualties.

The study of risk perception, particularly its relationship with decision making, is

dominated by the work of the Oregon Decision Research Group led by Slovic,

Fischoff and Lichtenstein. While this work, known as the "psychometric tradition" is

concerned with decision making, it is largely concerned with the public's viewpoint,

rather than that of managers - although managers are in effect part of the public. As

such the work has generated an impressive body of data on individuals' perceptions,

which describes people's judgement of hazards and their risks based on subtle and

complex relationships between multiple qualitative dimensions. The work has so far

failed to produce progress towards a theoretical explanation of risk perceptions.

(Smallman, 1996)

16
As pointed out by Resnick (1998), life insurance is purchased for the purpose of

transferring risk. Hence, there is a tendency for an individual to acquire higher life

insurance coverage, ceteris paribus if he perceives himself exposed to high personal

risk.

Vaughan and Elliott (1978) established that the probability a risk may or may not

occur is less important and the financial burden it would impose. Hence, the

commitment towards life insurance premium should be directly related to one's

economic value and not depend on the risk perceptions. Kletz (1996) suggested that

the probability of an incident is, of course, one of the factors that the public takes into

account, but it is not the only one, and in addition the public's knowledge of the

relative size of different risks is often far removed from their actual sizes. Risk

behavior is conceptualized as an individual's decision-making behavior in risky

contexts, and may be characterized by the degree of risk associated with the decisions

made (Sitkin and Pablo, 1992). They also observed that a number of theoretical

perspectives relied on the view that risk behavior is ultimately determined by the label

attached to a risky situation. In tum, the level of risk associated to each situation is

often a direct output of one's perception.

A comprehensive literature search found no study has ever been performed to

establish the relationship between individual attitude towards personal risks with their

life insurance ownership. However, based on the literature review, it was evident that

these two variables are closely linked. The empirical findings on their relationship

will be able to help the life insurance agents to strategize and promote their market.

17
 Chapter 3

RESEARCH FRAMEWORK AND METHODOLOGY

The entire research framework, definition of variables, development of hypotheses,

research design, questionnaire administration and data collection method will be

discussed in this chapter.

3.0 Research Framework

This study attempts to investigate the impact of demography, perception of life

insurance benefits and attitude towards personal risks on individual life insurance

ownership. The impact of education level on the perception of life insurance benefits

will also be examined. A model was developed for further illustration on the

relationship between the dependent and the independent variables (Figure 3.1 ). As

shown, the dependent variable is life insurance ownership that measured the amount

of annual life insurance premium paid, while the independent variables are depicted

as attitude toward personal risks, demography (Age, gender, income and ethnicity).

The education level is also depicted to be affecting the perception of life insurance

benefits.

The schematic diagram of the research model is shown in Figure 3.1

Figure 3.1: Research Model

Policyholders Demography

Independent Variables Dependent variable

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Based on the literature review described in chapter 2, the above research model is

established. It will form the core structure for the entire study. In addition, the effect

of education level on perception of life insurance benefits will also be studied.

3.1 Definition of Variables

3.1.1 Individual Life Insurance Ownership

This is the dependent variable. It is defined as the total amount of annual life

insurance premium paid by the respondent. The annual premium paid was deliberately

designed in the categorical format to ease response and maintain respondents'

confidentiality.

3.1.2 The demographic variables

Based on the literature review, gender, ethnicity, age and gross monthly

income were conceptualized and believed to be relevant.

3.1.3 The perception of life insurance benefits

The intention to adopt and modify existing questionnaire for this category

failed when the comprehensive literature review failed to find one. Hence, oral

interviews with four insurance agents, three agency supervisors, three agency

managers and ten MBA students was conducted to conceptualize how people perceive

life insurance benefits. Those valuable inputs were then validated through extensive

literature review. Protection, saving, financial return, retirement, major illness

funding, children education fund, social status and love expression to family were

identified to be the major benefits of life insurance. These constructs were then

measured through questionnaire using a 7-point scale rating from strongly disagree to

strongly agree.

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3.1.4 The Attitude Towards Personal Risks

The constructs of personal risks were conceptualized based primarily on the study

of Wood, Lilly, Malecki and Rosenbloom (1984) titled "Personal Risk Management

and Insurance". The same interview conducted to assess the perception of life

insurance benefits was repeated for the attitude towards personal risks. Vaughan and

Elliot (1978) study of "Fundamental of Risk and insurance" then further substantiated

it. Physical disability, probability of accident, workplace safety, hazardous

environment, terminal disease, food hygienic and premature death were used to

measure individual attitude towards personal risk.

3.2 Development of Hypotheses

Based on the theoretical framework, the following hypotheses were generated:

Hl: The individual life insurance ownership for male is higher than female.

H2: The individual life insurance ownership for Non-Malay is higher than Malay.

H3: The higher the income, the more life insurance will be owned.

H4: Those ages above 35 years old own more life insurance than those below.

H5: The better the perception of life insurance benefits, the more life insurance

will be owned.

H6: The stronger the attitude towards personal risks, the more life insurance will

be owned.

H7: Higher education level will demonstrate better perceptions of life insurance

benefits.

3.3 Research Design

3.3.1 Type of Study

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 This is a correlational study involving cross-sectional data. The objective of

this study is to establish the relationships between the dependent variable (Individual

life insurance ownership) with the independent variables such as demographic factors,

perception of life insurance benefits and attitude towards personal risks. The study

also attempts to find out that how much does the education level influence one's

perception of life insurance benefits.

3.3.2 Nature of Study

This is an analytical study aimed towards establishing the empirical

relationship between the dependent variable and the independent variables.

3.3.3 Study Setting

This is a field study that investigates the convenient sampled individual,

regardless of whether or not they have a life insurance policy. No artificial setting was

introduced.

3.3.4 Unit of Analysis

The unit of analysis is the individual ownership of life insurance. It measures

the amount of annual life insurance premium paid by the respondents.

3.3.5 Population and Sample

The population of this study consists of all Penang residents. A total of 300

questionnaires (hardcopy) were distributed through convenient sampling. 247 were

returned. However 60 of the respondents who did not possess any policy were

discarded giving a useable response rate of 62.3%.

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3.4 Questionnaire Design

The questionnaire was written in English, all were short and concise to enable

speedy and candid response. None of them was adopted from any previous study. A

pilot study was done by distributing ten questionnaires to 3 different social groups,

differing in education level to check the clarity of content. The response was positive

with 80% who understood them clearly. Two were not able to comprehend due to the

poor command of English and were discarded. The researcher verbally translated and

walks through the questionnaire with respondents who do not have a good command

of English.

The questionnaire consists of three parts. The first part consists of 8 items designed to

measure the perception of life insurance benefits. The second part of 7 items was

designed to measure the attitude towards personal risks. The last part consists of 11

elements of demographic variables and the dependent variable, individual life

insurance ownership, measured in seven different ranges. The questions for the first

two parts were measured using the Likert scales, scored based on a 7 -point rating

from strongly disagree to strongly agree. The dependent variable, the life insurance

ownership was designed to be categorical instead of continuos to smoothen and speed

up response, as it is very difficult to remember the exact amount of individual annual

life insurance premium paid. Moreover, individual privacy is another concem.

3.5 Data Collection Method

In view of the time constraint faced by the researcher, a convenient sampling was

adopted in this study. Three hundred questionnaires were hand-delivered to all

respondents by the researcher himself and three other helpers at various communities

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on Penang Island. Most of the completed questionnaires were collected on the spot

but some of them were returned a few days later. 53 questionnaire never got returned

due to unknown issues. Also, sixty questionnaires with zero policy were discarded.

Net responses was only 187.

3.6 Data Analysis

The data collected for this research was analyzed using the SPSS version 6.0. All

positively worded questions from section I-II carry the score that is equivalent to their

selected scales. The score for the negatively worded questions is subtracted from 8

from the selected scale. A frequency table for each question in the questionnaire was

generated to ensure correctness of data entry. Apart from supportive face validity

established through literature review in chapter 2, question 1 through 15 from section

1 and 2 will be subjected to Cronbach's alpha value checks to ensure adequate

reliability.

Means and standard deviation for all questions in part I-ll were also computed to

review the central tendency respondents' distribution. On the other hand, the

frequency and percentage for all categorical variables were also established. These

will be used to determine the relationship with the dependent variable.

Since the dependent variable (Individual Life Insurance Ownership) is categorical

instead of continuos, the chi-square testing of alleged independence of two qualitative

variables were adopted to test the various factors affecting individual life insurance

ownership. For part I and part II, the mean values for overall questions is calculated

and categorized into "Below" and "Above" median, the median was chosen instead of

mean value to ensure equal group size. They were then combined with all the

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categorical variables in section 4 to run the chi-square-alleged independence of two

qualitative variables. Also, the categorical variable of education level and was ran

through one way ANOV A with respect to perception of life insurance benefits to

assess if there is a significant different of mean values for different education level.