1. ASSESSMENT OF FACTORS AFFECTING HOUSE HOLDS DEMAND FOR LIFEINSURANCE: (THE CASE OF NEKEMTE TOWN)A PROJECT PAPER SUBMITTED TO SCHOOL OF GRADUATES STUDIES IN PARTIALFULFILLMENT OF THE DEGREE OF MA IN BUSINESS MANAGEMENT ANDADMINISTRATION.BY: GEDA MISGANUMAJOR ADVISOR: GETACHEW BESHARGO (PH.D) CO-ADVISORS: Mr. SARFARAZ KARIM Mr. ELIAS GIZACHEW FEBRUARY, 2012 WOLLEGA UNIVERSITY
2. ASSESSMENT OF FACTORS AFFECTING HOUSE HOLDS DEMAND FOR LIFEINSURANCE: (THE CASE OF NEKEMTE TOWN) BY: GEDA MISGANU GOBENAA PROJECT PAPER SUBMITTED TO THE PROGRAM OF BUSINESS ADMINSTRATION FACULITY OF COOPERATIVES AND MANAGEMENT, SCHOOL OF GRADUATES STUDIES, WOLLEGA UNIVERSITY NEKEMTE, ETHIOPIA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREES OF MASTER OF BUSINESS ADMINSTRATION FEBRUARY, 2012
3. APPENDIX-CApproval sheet-1This is to certify that the project entitled Assessment of factors affecting house holds demand forlife insurance, submitted in partial fulfillment of the requirements for the degree of masters inBusiness Administration Program, School of Cooperative and Management, and is a record oforiginal research project carried out by Geda Misganu ID.NO WUSGS/016/10, under mysupervision, and no part of the research project has been submitted for any other Degree orDiploma.The assistance and help received during the course of this investigation have been dulyacknowledged. Therefore I recommend that it be accepted as fulfilling the research projectrequirements.______________________ _____________ ____________Name of Major advisor Signature Date______________________ _____________ ____________Name of Co-advisor Signature Date______________________ _____________ ____________Name of Co-advisor Signature Date i
4. APPENDIX-DApproval sheet-2We the under signed, members of the Board of Examiners of the final open defense by GedaMisganu have read and evaluated his research project entitled ―Assessment of factors affectinghouse holds demand for life insurance‘‘, and examined the candidate. This is therefore to certifythat the research project has been accepted in partial fulfillment of the requirements for thedegree of Masters in Business Administration.____________________________ ___________ _______________Name of the chair person Signature Date____________________________ ___________ _______________Name of major advisor Signature Date____________________________ ___________ _______________Name Internal Examiner Signature Date____________________________ ___________ _______________Name External Examiner Signature Date ii
5. AcknowledgementFirst of all I would like to thank the almighty God for all. Next I wish to express my sincereappreciation to my advisor, Dr. Getachew Beshargo, for his encouragement, insightful guidance,patience, and support. I would like to thank Mr. Sarfraz karim, and Mr. Elias for their time andrelentless efforts in correcting this paper. Finally, I extend the deepest and warmest thanks to myfamily for their endless love and encouragement that made me stronger in different aspects. iii
6. Table of contentsTitle PageAcknowledgement --------------------------------------------------------------------------------iAbstract --------------------------------------------------------------------------------------------iiTable of content ----------------------------------------------------------------------------------iii1. Introduction -----------------------------------------------------------------------------------11.1 Back ground of the study -------------------------------------------------------------------11.2 Description of the study area ---------------------------------------------------------------11.3 Statement of the problem -------------------------------------------------------------------31.4 The research questions-----------------------------------------------------------------------1.5 Objectives of the study ----------------------------------------------------------------------31.6 Significance of the study---------------------------------------------------------------------41.7 Scope of the study----------------------------------------------------------------------------42. Literature review ----------------------------------------------------------------------------52. Definition of insurance -----------------------------------------------------------------------52.1Historiccal back ground of Insurance in Ethiopia----------------------------------------52.2 Insurable risks --------------------------------------------------------------------------------62.3 Types of life Insurance ----------------------------------------------------------------------62.4 Benefit insurance ----------------------------------------------------------------------------112.5 The development level of Insurance in Ethiopia ----------------------------------------112.6 Insurance and society perspective ---------------------------------------------------------122.7. Studies on Life Insurance Purchase Decisions-------------------------------------------123. Research methodology ----------------------------------------------------------------------193.1 Population------- -----------------------------------------------------------------------------193.2 Data requirement-----------------------------------------------------------------------------3.3 Sample size------------------------------------------------------------------------------------3.4 Sampling procedure--------------------------------------------------------------------------3.5 Source and method of data collection------------------------------------------------------3.6 Data processing and analysis ---------------------------------------------------------------203.7 Method of presentation ---------------------------------------------------------------------204. Tentative work plan -------------------------------------------------------------------------215. Estimated budget to conduct the research----------------------------------------------226. Reference -------------------------------------------------------------------------------------237. Appendix -------------------------------------------------------------------------------------24 iv
7. AbbreviationsEIC- Ethiopian Insurance CorporationSPSS-Statistical Package for Social SciencesPC- personal computerWL-whole life insuranceUL-universal life insuranceVL-variable life insuranceVUL -variable universal life insuranceMCA -Multiple Classification AnalysisLIMRA -Life Insurance Marketing and Research AssociationACLI -American Council of Life InsuranceETB- Ethiopian Birr v
8. List of tablesTable 1.1 Classification of respondents based on ageTable 1.2 Classification of respondents based on sexTable 1.3 Classification of respondents based on marital statusTable 1.4 Classification of respondents based on their occupation.Table 1.5 Classification of respondents based on their educational levelTable 1.6 Classification of respondents based on their religionTable 1.7 Classification of respondents based on their family monthly incomeTable 2.1 Analysis of house holds awareness about the availability of life insurance product inthe town.Table 2.2 Analysis of the availability of insurance company in respondent‘s kebeleTable 2.3 Analysis of life insurance purchaseTable 2.4 Analysis of house holds attitude/ out look towards life insuranceTable 3.1 Summery of major factors for life insurance purchase decisions vi
9. AbstractThis project was focused at assessing various factors affecting house holds demand for lifeinsurance in Nekemte town, where the average selling and purchase of life insurance contract isstill lower. Having life insurance products available in the town, one continues to wonder whythe majority of the house holds in Nekemte town does not have any life policy. This resulted intofinding out what factors play very important role in the life insurance policies purchase. Theobjective of the study was to asses the factors underlying house holds perception towardsinvestment in life insurance and their views towards life insurance. The data was obtained from200 house holds in Nekemte town by using schedule type of questionnaire. The general analysisabout factors affecting house holds demand for life insurance in Nekemte town. Findings andresults are performed. To the end the study also forwarded possible recommendations andcomments that might be helpful for the growth of life insurance business by avoiding orminimizing the gap between insurance companies and the house holds. vii
10. Chapter One1. Introduction 1.1 Back ground of the studyLife is full of risks and uncertainties since, we are social human beings; we have certainresponsibilities too to minimize these risks. Since we are human beings we believe in futurerather than the present and desire to have a better and secured future. In this regard, a lifeinsurance service has its own value in terms of serving as savings, investment and riskprotection. According to Rejda (1998) Insurance is the pooling of fortuitous losses by transfer ofsuch risks to insurers (Insurance companies), who agree to indemnify insured, for such losses, toprovide other pecuniary benefit on their occurrence or to render services connected with the risk.Under any insurance arrangement, a large number of persons agree to share a loss which a few ofthem are likely to incur in the future. Such sharing has the advantage that the individual share ofloss is relatively small. When the sharing is done amongst a large number of persons, theindividual share remains fairly steady from year to year. Such association of persons for sharinganticipated losses may be brought about voluntarily by all participants or may be organized by afew individuals or by an insurance company. The function of insurance in its various forms is toprotect against heavy financial impact to anticipated misfortune by spreading the loss amongmany who are exposed to the risk of similar nature. While it is not possible to predict whichindividuals among the many participants are likely to be the victims of misfortunes, it is oftenpossible to forecast the quantum of the loss which the group as a whole may suffer. The sharingof such loss amongst the participants insures that the victims are compensated for the losssuffered by them as a consequence the heavy and uncertain loss to some is neutralized bydefinite contribution of moderate amount that every participant is required to make.Life insurance is the business of affecting the contracts of insurance upon human life includingany contract whereby the payment of money is assured on death or the happening of anycontingency dependent on human life and any contract which is subject to the payment ofpremiums for a term dependent on human life. In addition to the above definition, insurance can also be defined from the view point ofseveral disciplines including law, economics, history, actuarial science, risk theory and
11. sociology. But each possible definition will not be examined at this point. Insurance is not thebasic tools of risk management but it is easily the most important illustration of the transfertechniques and the key stone of most risk management programs.1.2 Description of the study areaThe study had been conducted to identify various factors affecting house holds demand for lifeinsurance in Nekemte town. Nekemte Town is in western sub region of Oromia, at the distanceof 331 Km from Addis Abeba to the west with specific location of 90 04/ North latitude and 36030/ East longitudes. Currently the town is devided administratively into six sub-citiesadministrative divisions, more than 78 clusters and above 301 development groups. The subcities are Bakanisa Kese, Bakke Jama, Burka Jato, Chalalaki, Darge, Kasso. Presently, the townhas 20,870 house holds. The most dominant vernacular is Afan Oromo and other languages likeAmharic, Guraginya, Tigrigna, etc.Today in the town there are (4) four insurance companies. These are Ethiopian InsuranceCompany, Nyala Insurance Company, Oromia Insurance Company and Awash insurancecompany. Ethiopian Insurance Company is the only insurance company currently selling lifeinsurance contract in the town where as the rest three are selling life insurance services at theirhead office only, because of less consumption in regional and branch offices. The study washowever focused on the customer side of the life insurance market in Nekemte Town.However, no research had been yet conducted and published on the customer side of lifeinsurance market in the town.
12. 1.3 Statement of the problemThere are different perils that can destroy, wholly or partially, the economic value of human life.These include premature death, loss of health, old age, and unemployment. Here life insurance isneeded because it is a social and economic devise by which a group of people may cooperate toameliorate the loss resulting from such events on members of the group. In Nekemte the averageselling and purchase of life insurance by house holds is very low (Didessa Life, BranchManager). Even though there is an insurance company having life insurance products availablein the town, majority of the house holds and even majority of the population in the town does nothave any life policy. The researcher believed that taking into consideration the above mentionedissue was very much helpful for determining way and method to exploit the unexploited potentialof life insurance market in the town.1.4 The research questionsThe study focused on answering the following basic questions. 1. What are the possible reasons of non-consumption of life insurance by majority of the house holds? 2. What are the major factors that affect house holds demand for life insurance? 3. What house holds think and how they behave (house holds attitude) towards life insurance product in Nekemte town?
13. 1.5 Objectives of the studyGeneral objectiveThe general objective of the study is to identify determinant factors affecting the house holdsdemand for life insurance in Nekemte Town.Specific objectives 1. To provide insight into the possible reasons of non-consumption of life insurance by majority of the house holds through analyzing facts and opinions of selected individuals in the Town. 2. To determine major factors that affect house holds demand for buying life insurance. 3. To reach on certain conclusion on the way house holds think and behave towards life insurance product. 4. To come up with some suggestions and recommendations for policy makers.1.6 Significance of the studyConducting a research on ―factors affecting the purchase of life insurance in Nekemte town‖ isexpected to have importance to different parties. The following are the expected contributions ofthe study for insurance companies and other interested researchers. It will provide some insights about reasons for non-consumption of life insurance by the majority of the population. It tries to recommend appropriate ways to encourage consumers for buying life insurance. It will serve as bases for other researchers who are interested for further investigation on the issue.
14. 1.7 Scope and limitations of the studyIn this study the researcher only assessed various factors that affect house holds demand for lifeinsurance in Nekemte town. The study focused on house holds whose monthly income is aboveone thousand five hundred. The study area is limited to the town because of high resourcerequirement for conducting the research and vastness of the area.In summery, the following are the major limitations of the study. The number of sample house holds taken may not be large enough to represent the whole population. Shortage of time for very detailed investigation of the respondents. Financial shortage and shortage of other material resources.
15. Chapter Two2. Literature ReviewDefinition of insuranceInsurance is a major component of the financial sector. It is a risk transfer mechanism, where bya proposer (the insured) transfer some uncertainties of life and property to an insurance company(insurers) in a consideration for to a payment of money, a premium and this makes insurance aprime importance in modern economies. It enables different sectors as well as individuals toreduce and better mange the uncertainty of the future. (Williams and Heins 1981)2.1 Historical background of insurance in EthiopiaThe first insurance business was transacted by bank of Abyssinia, which began operation in1905, during the reign of Menelik II, as an agent to a foreign company. The covers given by thebank of Abyssinia were for fire and marine risks. Another agent was an Austrian namedWeinsinger where represented the ―Baloise‖ fire insurance company some time in 1923. Untilthe beginning of the 1950‘s there was no locally incorporated insurance company in Ethiopia.The first insurance company known as the imperial insurance company was formed in 1951.(Haile Mchael Kumsa, 1987pp 30-31)There had been so many branches of foreign insurance companies in Ethiopia but afterproclamation number 281/1970 foreign companies was not allowed to operate in the countryeither directly or though agency.The new era of insurance industry in Ethiopia was since the establishment of EthiopianInsurance Corporation by proclamation number 68/1975, insurance services have been expandedthrough out the country and new products have been designed by giving special attention to therural agricultural sector. (Haile Michael Kumsa, 1987 pp.36). Since then insurance industry hadbeen monopoly seized by Ethiopian Insurance Corporation, until 1994 when private insurancecompanies began to appear by the new proclamation number 86/1994.
16. After this proclamation a number of insurance companies established. Today there are 10(ten)private insurance companies and 1 (one) government owned insurance company. They are;Ethiopian insurance corporation (government aimed), National insurance company of Ethiopia,United insurance company, Nile insurance company, African insurance company, Nyalainsurance company, Global insurance company, Lion insurance company, Awash insurancecompany, Oromia Insurance company and NIB insurance company.2.2 Insurable risksEven though insurance companies give compensation for the insured upon risk occurred to themonly for tutors losses are insurable, that is one that is unforeseen and unexpected and occurs as aresult of chance. (George E. Rejda page21) Risk exits whenever future is unknown. Because the adverse effects of risk have plagued mankind since the beginning of time, individuals groups and societies have developed variousmethods for managing risk. Since no one knows future exactly, every one is a risk manger not bychoice but by share necessity.There are many examples of risk: a homeowner faces the possibility of economic loss caused bya house fire, a driver faces a potential economic loss if his car is damaged or if might have to payfor injures caused to a third party in a car accident. Normally, only a small percentage ofpolicyholders suffer losses. Their losses are paid out of the premiums collected from the pool ofpolicyholders. Thus, the entire pool compensates few unfortunates as each policyholderexchanges an unknown loss for the payment of a known premium. (Anderson & Brown, 2000).Human life value approach focuses on the economic component of human life. Any eventaffecting an individual‘s earning capacity has an impact on the individual‘s human life value.This event may be premature death, incapacity, retirement or unemployment (Black and Skipper,2000). The human life value concept provides the philosophical basis for the life insurance,which is a product designed to protect the individual against two distinct risks: premature deathand superannuation (Browne and Kim, 1993). Thus, while death is not a risk, the time of death
17. is. For most people, death at any age may be considered premature when one dies beforeadequate preparation has been made for future financial requirements of dependants. Lifeinsurance thus becomes the mechanism for one to ensure a continuous stream of income to thebeneficiaries (Black and Skipper, 2000). In this regard, life insurance may be regarded as asaving medium, financial investment, or a way of dealing with risks (Omar and Owusu-Frimpong, 2006).2.3. Types Life InsuranceFrom a generic viewpoint, life insurance policies can be categorized as either term life insuranceor cash value life insurance (Rejda, 2004). Term life insurance provides temporary and pureprotection, whereas cash value life insurance policies not only provide protection for the wholelife of the insured but also builds a source of saving/wealth, which is called; the cash value. Anumber of cash value life insurance policies are available to consumers. This section will reviewterm life insurance and the primary cash value life insurance policies: whole life insurance (WL),universal life insurance (UL), variable life insurance (VL), and variable universal life insurance(VUL).2.3.1 Term Life InsuranceTerm life insurance provides insurance protection for a limited time and pays a death benefitonly if the insured dies during that period. If death does not happen during that period, the policycan be renewed for additional periods without evidence of insurability, if it has a guaranteedrenewable feature. Term life insurance is pure protection. It does not have a cash value. Initially,when the insured is younger, premiums are lower than the premiums of cash value life insurance.Term life insurance premiums, however, increase with the insured‘s age because the probabilityof death increases with each year of life.Based on the features of term life insurance, people have drawn consistent conclusions on whenit is appropriate to use term life insurance. As Rejeda (2004) and Trubey (1999) suggest term lifeinsurance is suitable in the following situations: if the insured has limited income that can bespent on life insurance, such as young people who are just beginning their careers or families; orif the need for protection is temporary, such as saving for children‘s education or paying off a
18. mortgage or other debts if the family head dies prematurely. Angell (1981) stated that term lifeinsurance is an ideal plan to carry if the insured has the necessary self-discipline to regularlyinvest the difference in term and cash value life premiums. He readily admitted, however, thatmany people do not have this self-control.2.3.2 Whole life insuranceIn contrast to term life insurance, which provides temporary protection, whole life insurance(WL) is the most basic cash value life insurance offering lifetime protection. Premiums remainlevel and fixed throughout the policy‘s life; they will not increase with the age of the insured.The death benefit is guaranteed and remains constant. Under a whole life insurance policy, theinsured is overcharged for the insurance protection during the early years and underchargedduring the later years. Whole life insurance has an investment or saving element called thepolicy‘s cash value which is built by the greater premiums required in the early years of thepolicy‘s life. With whole life insurance, the cash value is guaranteed to grow at a fixed rate ofinterest that is not known to the owner of the policy. As the cash value increases as a proportionof the face value, the amount of pure protection decreases. At any given age, the sum of theprotection element and the cash value element will always equal the face amount of the policy.To secure the guaranteed growth rate of WL, the insurer chooses relatively conservative financialvehicles in order to assure that their assets meet their liabilities. This, in turn, causes a relativelylow rate of return. A key feature of WL is that the increases in cash value are not subject toincome tax if the policy is held until the insured‘s death. The death benefit, paid to thebeneficiary, is received free of income-tax.
19. The cash value can be taken in cash by surrendering the policy or borrowing against the policyrequiring interest to be paid by the owner of the policy on the loan in order to offset the loss ofinterest to the insurer. This interest is relatively low and the loan principal need not be repaid,however, the death benefit is reduced by the amount of any outstanding balance on the loan.Though cash value life insurance has a saving element, the insured should keep in mind that thefundamental purpose of life insurance is to provide financial protection for the family. Thesaving and investment purpose of cash value life insurance is usually a secondary concern(Angell, 1981). Angell suggested that when families have sufficient money left over, cash valuelife insurance can be purchased as an investment, after all other tax advantaged saving vehicleshave been exhausted. Trubey (1999) advocated that whole life insurance is the proper choicewhen the insured wants both lifetime protection and cash accumulation; wants additional incomeduring retirement; wants to leave an estate to their heirs; needs money for estate settlement costsand taxes; or to save money for children‘s college funding. For many individuals, whole lifeinsurance may be a suitable, competitive choice, but the cost of the premiums makes WLunaffordable.2.3.3 Universal Life InsuranceUniversal life insurance (UL), introduced in 1979, has been the most popular type of cash valueinsurance sold in recent years. According to LIMRA‘s report, UL accounted for 41% of totalpremiums in 2007 and the sale of UL outperformed that of other cash value life insurance policytypes. Universal life insurance is different from whole life insurance on a number of factors(Shaw, 1985). First, the protection and saving elements are separated and unbundled in UL.Thus, in contrast to whole life insurance, the death benefit and cash value accumulation are notbeing guaranteed but the rate of return and cost of insurance are explicitly known. Second, unlikewhole life insurance, UL does not require a fixed schedule of premium payments; instead, thepremium payment schedule is flexible. Flexibility allows policy owners to skip scheduledpremium payments occasionally without causing the policy to lapse. Third, under WL, the policyowner captures cash value by surrendering the policy or borrowing against the policy. A ULpolicy holder, in contrast, can access his or her cash value by making partial withdrawals inaddition to the two options offered with WL. Finally, though UL does not guarantee a fixedgrowth rate, it assures a minimum rate of interest, and it credits a current interest rate to thepolicy.
20. The same income tax treatment applies to UL as to WL.As Shaw (1985) indicated, universal life offers flexibility and adaptability in several areasmaking it a more appealing alternative to most households as compared with whole lifeinsurance. The insured that is willing to give up certain contractual guarantees in exchange forpotentially greater cash value growth will be attracted to universal life (Trubey, 1999).2.3.4 Variable Life InsuranceVariable life insurance (VL) can be defined as a fixed premium policy in which the death benefitand cash values vary as a result of the investment performance of a separate account (Rejeda,2004). Variable life insurance is the other form of cash value life insurance that performs liketraditional whole life insurance in some ways: fixed premiums, guaranteed death benefit equal tothe original face value, and no partial withdrawal. The main differences between WL and VL areregarding how the cash values are invested and with respect to who assume the risk of theunderlying investment. Under WL, cash value growth is generated by investing in fixed-interestvehicles and the insurer assumes the risk of investment performance. In contrast, the owner ofthe policy under a VL has a right to choose various financial vehicles to invest premiums, suchas mutual funds of stocks, bonds, or money market securities. Investment options can be changedafter original purchase, thus making the decision one that is more close to an investment decisionas opposed to an insurance decision. When changing account investment choices, an accounttransfer fee could apply. If the investment performance is favorable, the face amount of lifeinsurance is increased. If the investment performance is poor, the face amount of life insurance isreduced, but it will typically not fall below the original face amount. Thus, the owner of thepolicy bears the risk of investment results, as opposed to the insurer. Since premiums can beinvested in a variety of favorable investments, the VL policy has the opportunity to providepotentially greater cash value growth than that available in WL. Hence, those who need long-term insurance protection and a fixed predictable premium payment, but are not satisfied withthe conservative rate of return associated with whole life and prefer potentially greater tax freecash value growth, a VL policy may be a suitable option (Trubey, 1999). Of course, VL policyowners must be knowledgeable about investments and willing to accept the greater risk of poorinvestment results.
21. 2.3.5 Variable Universal Life InsuranceVariable universal life insurance (VUL), introduced in 1984, is a popular type of cash valueinsurance that has been widely sold in recent years. It combines the features of universal life withvariable life. These features include flexible premiums, adjustable death benefits, more methodsof accessing cash value, more investment choices, and the potentially higher rate of return andthat comes with accepting greater risk. Most VUL are sold as investments or tax shelters(Rejeda, 2004).Like UL, VUL allows the policy owner to adjust the amount and frequency of premiumpayments and death benefits to meet his or her needs. The policy owner determines how to investthe premiums under a VUL policy. The premiums are held in separate accounts which are notsubject to creditor claims of the insurer (Freeman, 1995). The types of investments are the sameas those of VL, ranging from very conservative guaranteed fixed accounts, to bonds, to commonstocks and highly aggressive sector funds. The policy owner can also choose how much of theirpremiums will be allocated into the various accounts, allowing for a potentially greater rate ofreturn. Internal transfers between the different accounts are free of income tax. Like VL, VULhas no guaranteed minimum cash value since the cash value depends on the performance of theunderlying investments. Variable universal life insurance policies have substantial investmentrisk. The policy owner totally bears the risk of investment. Investment returns rely on how thepremiums are invested. If the investment performance is poor, cash values can drop to zero.Therefore, the policy owner should be familiar with investing and be able to choose hisinvestment well (Trubey, 1999). The VUL policy has significant expense charges includinginvestment, management and mortality costs. According to a study by the Consumer Federationof America (CFA) in 2003, these various costs can more than offset the tax benefits of VULpolicies. Thus, CFA advised purchasing a VUL only when the policy owner has made maximumannual contributions to his or her employer‘s 401(k) plan or individual retirement account (IRA)because they provide favorable income tax treatment at a much lower cost. This advice alsoapplies to other cash value life insurance purchase since the expense loading of cash value lifeinsurance is relatively high when compared to competing investments
22. 2.4 Benefit of insuranceInsurance have so many benefits to the society, such as indemnification which means it permitsindividuals, families, business and any other exposures to be restored to their former financialposition. The indemnification function contributes greatly to family and business stability andtherefore is one of the most important social and economic benefits of insurance. Worry and fearare reduced both before and after risk ―if family heads have adequate amount of life insurancefor example, they will be less likely to worry about the financial security of their dependents inthe event of premature death, person insure for long term disability do not have to worry aboutthe loss of earnings of series illness or accident occurs and property owners who are insuredenjoy greater piece mind since they known they are covered if the loss occurs‖.Loss prevention - insurance companies are actively involved in numerous loss preventionprograms and also employ a wide variety of less prevention personnel, including safety engineersand specialists in fire prevention occupational safety and health and products and liability.Enhancement of credit – insurance makes a borrower a better credit risk because it guarantiesthe value of the borrowers collateral or gives greater assurance that the loan will be repaid.(George E. Rejida 7th ed. Page 28-30) There are many social and economic values of insurance, but perhaps the greatest value lies inthe reduction of risk in society. The benefits of insurance are achieved at certain social costs.The chief of which is the cost of the economic resources used to operate the insurance business.(Triechmann Gustovson, 10th edition page 149) 2.5 The development level of Insurance in EthiopiaInsurance being one of the service activities, is also very little known to the majority of thepeople. In fact insurance as it is known today is a resent phenomenon in Ethiopia. However,there have been traditional associations where by people contributed either money or labor toassist each other whenever a member faces financial difficulties or needs assistance; for exampleto build a house or harvest crops. Among these associations ―Edir‖ and ―Ekub‖ have somesimilarities with modern insurance. In case of ― Edir ― people form an association where by eachmember a fixed sum normally monthly, to a common fund from which predetermined
23. compensation are paid to members upon occurrence of un for seen events such as death of familymembers or relatives. The compensation is meant to cover expenses that a member would incuras result of the incident.The other insurance type of association is ―Ekub‖. ―Ekub‖ members contribute a fixed sum ofmoney weakly, fortnightly or monthly to a pool of fund and lots are cast where upon the winnerreceives the money so collected and uses if for a project if he/ she has one or sells it to anothermember at a premium. If something happens to a member, who had already taken the money thatwould not enable him to continue contributing to the fund, his guarantees will have to be heldresponsible (Haile Michael Kumsa 1987, page 28-30)2.6. Insurance and society perspectives Insurance is a business and an investment it has been described as the business that exists inorder to insurance to success and survival of other business. (National Bank of Ethiopia, Birritu,1996) One of the reasons why the large portion of the insurance buying public is not buyinginsurance may be on the one hand, lack of knowledge about the risk exposure an n the other handlack of confidence. Through education and supply of relevant information the insurance industrycan fair the confidence of the public to cooperate with it to preserve the national assets by way ofan insurance contract. (National Bank of Ethiopia, Birritu 2000 no. 77)2.7. Importance‘s of life insuranceAccording to (Ms. Naveen Dual) insurance is a contract under which the insurer (InsuranceCompany) in consideration of a premium paid undertakes to pay a fixed sum of money on thedeath of the insured or on the expiry of a specified period of time whichever is earlier.In case of life insurance, the payment for life insurance policy is certain. The event insuredagainst is sure to happen only the time of its happening is not known. So life insurance is knownas ‗Life Assurance‘. The subject matter of insurance is life of human being. Life insurance
24. provides risk coverage to the life of a person. On death of the person insurance offers protectionagainst loss of income and compensate the titleholders of the policy.Life Insurance is of great importance to individuals, groups, business community and generalpublic. Some of the main benefits of life insurance are given below. i. Protection against untimely deathLife insurance provides protection to the dependents of the life insured and the family of theassured in case of his untimely death. The dependents or family members get a fixed sum ofmoney in case of death of the assured. ii. Saving for old age.After retirement the earning capacity of a person reduces. Life insurance enables a person toenjoy peace of mind and a sense of security in his/her old age. iii. Promotion of savings.Life insurance encourages people to save money compulsorily. When a life policy is taken, theassured is to pay premiums regularly to keep the policy in force and he cannot get back thepremiums, only surrender value can be returned to him. In case of surrender of policy, thepolicyholder gets the surrendered value only after the expiry of duration of the policy. iv. Initiates investmentsLife Insurance Corporation encourages and mobilizes the public savings and channelizes thesame in various investments for the economic development of the country. Life insurance is animportant tool for the mobilization and investment of small savings. v. Credit worthinessLife insurance policy can be used as a security to raise loans. It improves the credit worthiness ofbusiness. vi. Social SecurityLife insurance is important for the society as a whole also. Life insurance enables a person toprovide for education and marriage of children and for construction of house. It helps a person tomake financial base for future. vii. Tax BenefitUnder the Income Tax Act, premium paid is allowed as a deduction from the total income.
25. 2.8. Important terms in insuranceAccording to (Robert H. Flashman. 1997), the major reason most consumers buy life insurance isto provide financial support to beneficiaries in case the insured person dies prematurely.However, there are additional reasons why life insurance is purchased—to pay off debt or thebalance on a home mortgage upon death, for funeral expenses, for children‘s college education,and for investment and estate planning.Who is the owner?The policy owner is the person named in the insurance contract who has control of the policy.Usually, this is the person whose life is insured. Or a beneficiary, such as the spouse, could bethe owner.In other cases, neither of these parties is the owner. This often occurs when a business buysinsurance on its partners to cover the value of the insureds share of assets in the company.The policy owner has certain important rights to the policy, including: ♦ paying the premium; ♦ naming beneficiaries; ♦ determining the various options within the life insurance policy, such as ♦ Settlement options; ♦ Changing owners of the policy in the future; ♦ Borrowing from a cash buildup in the policy; and ♦ changing any other feature in the insurance policyWhy is ownership important?As previously mentioned, you do not have to be the owner of a life insurance policy coveringyour own life. The policyholder could be another person, such as a spouse or other relative, or atrust. Ownership has greater impact when major life events, such as divorce or death, occur.A life insurance policy is a legally binding contract and, as with any other contract, you need toknow what the contract actually says. Here are some commonly used insurance terms and theirdefinitions.Primary Beneficiary (-ies):-the individual(s) or organization who will receive money (called―death benefit,‖ ―face value,‖ or "proceeds") from the insurance company when the insuredperson dies.
26. Contingent beneficiary (-ies):-the individual(s) or organization who receives the proceeds if theprimary beneficiary (-ies) dies before the insured dies.Insured:-the person whose life is covered by the policy. When the insured dies, the death benefitis paid.Owner (policyholder) of life insurance contract (policy):-the person who exercises control overthe policy. The owner can make any changes without the consent of anyone else, includingbeneficiaries, unless there are court-imposed constraints in place.2.9. Basic principles of life insurance contractAccording to (Ms. Naveen Dual) the basic principles of life insurance are:-1. Insurable interestThe insured must have insurable interest in the life assured. In absence of insurable interest,Contract of insurance is void. Insurable interest must be present at the time of entering intocontract with insurance company for life insurance. It is not necessary that the assured shouldhave insurable interest at the time of maturity also.Insurable interest exists in the following cases: (a) A person has an unlimited insurable interest in his/her own life. (b) A person has an insurable interest in the life of his/her spouse. (c) A father has an insurable interest in the life of his son or daughter on whom he isdependent. Likewise a son may have insurable interest in life of his parents. (d) A creditor has an insurable interest in the life of the debtor, to the extent of the debt. (e) A servant employed for a specified period has insurable interest in the life of hisemployer.2. Utmost good faithThe contract of life insurance is a contract of utmost good faith. The insured should be open andtruthful and should not conceal any material fact in giving information to the insurance company,while entering into a contract with insurance company. Misrepresentation or concealment of anyfact will entitle the insurer to repudiate the contract if he wishes to do so.3. Not a contract of indemnityThe life insurance contract is not a contract of indemnity. A Contract of life insurance is not acontract of indemnity. The loss of life cannot be compensated and only a fixed sum of money is
27. paid in the event of death of the insured. So, the life insurance contract is not a contract ofindemnity. The loss resulting from the death of life assured cannot be calculated in terms ofmoney.2.10. Pricing of life insuranceAccording to Ms. Naveen Dual Pricing of insurance product is a complex task as premium ratesto be charged depend upon variety of factors namely, expected losses, operating expenses,income from investments and profit margin of the insurance company.Actuaries employed by the insurer calculate and determine the premium rates to be charged fordifferent policies and from people of different age.If the premium charged is very low, the company would not be able to collect sufficient amountto pay claims, bear expenses and earn some profit.On the other hand, excessively high premium charged will result in loss of prospective clients ofthe insurance company because company may lose the prospective insurer to its competitors inthe market.Pricing also depends on the market forces of demand and supply of insurance products.Pricing refers to the methods used to calculate rate of premium to be charged on insuranceproducts.Premium is a price for which the insurer is willing to accept the risk.The payment of premium by the proposer is acceptance of the price charged by the insurer forproviding the life insurance cover.Pricing objectivesThe following are the objectives kept in mind while deciding upon the pricing of variousinsurance products: i. adequacy ratesThe premium rates fixed by the insurance company should be adequate in order to pay thebenefits promised to the policyholders and meet all the operating expenses. In other words therates charged must be sufficient to collect the premium incomes the insurance company requiredto pay various operating expenses, to pay the claims and at some profit margin.
28. Insurers do conduct periodic reviews to assess whether the initial premium levels established areequitable and not too high i.e. adequate. ii. Fairness and rate equityThe insurance rates must be fair and equitable. The rates charged to the policyholders with thesame expected losses and other costs should be equal.This is known as rate equity. It means that the insurance company should charge premiums inaccordance with the expected payment of benefits and expenses.The rates must be same for homogenous groups and must not be same for heterogeneous groups(say of different age groups).If the two individuals of different ages, say one 25 years and other 50 years intend to purchasesame policy for the same time period with same terms, the insurer will be charging the higherrate of premium from the person who is 50 years old as there is comparatively higher deathprobability of the older client.In the case of the young person of 25 years the company cannot associate very high deathprobability.If there are two persons of the same age who want to take same policy with same terms andconditions but one person is chronically ill, the insurer must charge them different rates as the illperson has higher probability of dying at a certain age (so should be giving higher premium). iii. ReasonablenessThe rates of the premium charged to the policyholders should not be too high because it will leadto loss of insurance business to the competitors in the industry. Charging excessive premium istherefore unfair to the customers. iv. SimplicityThe premium rates charged should be simple to understand and should not change veryfrequently.Life insurance pricing elements 1. Rate of death of large number of insured persons. 2. Administration cost and other expenses of the insurer. 3. Income from investment of premium.
29. i. rate of death of large number of insured personsThe mortality rates depend on the age, occupation, life style, and medical history of the insured.The premium rates charged are calculated on the basis of rate of deaths of very large number ofpersons insured, i.e., the past experience of large number of cases is taken into considerationbefore deciding on mortality rate.ii. Administration cost and other expenses of the insurer:Every insurer incurs certain expenses or administrative costs related to the service provided. Theadministration cost incurred may depend on frequency of payment of premium and the volumeof records kept. If the premium is paid annually, cost is lesser as compared to quarterly and halfyearly or monthly payments.ii. Income from investment of premium:Premium collected by the insurance company from various policyholders is again invested andthe income earned on the same helps the insurance company to bear various expenses incurredand benefits given to policyholders.2.11. Studies on Life Insurance Purchase DecisionsThe demographic, economic and psychographic factors found to be the most robust in predictinglife insurance demand will be the focus of this review.2.11.1 Demographic Factors184.108.40.206 AgeThere are contradictory conclusions about the effect of age on the demand for life insurance. Forexample, Berekson (1972), Showers and Shotick (1994), Baek and DeVaney (2005) found thatthe effect of age was positive and significant, but Ferber and Lee (1980), Bernheim (1991) andChen et al. (2001) found a negative significant relationship between age and life insurancedemand, whereas Hammond et al. (1967), Duker (1969), Anderson and Nevin (1975), Burnettand Palmer (1984), Gandolfi and Miners (1996) argued that age was not a significant factor inpurchase of life insurance.Bernheim (1991) used a probit, a Tobit and a Heckman model, respectively to investigate theimpact of bequest motives on savings based on the estimates of the demand for life insurance,using the 1975 Longitudinal Retirement History Survey data. The youngest respondent was 64
30. years old and the oldest respondent was 69 years old in the 1975 survey. The effect of age on lifeinsurance holding was also examined in the models. The results of all three models showed thatthe probability of life insurance holdings fall with age. Bernheim pointed out that this negativerelationship could reflect dissaving behavior after retirement of the respondent. Using the 1984LIMRA data, Gandolfi and Miners (1996) found that age was negatively associated with thedemand for life insurance for husbands, while the age variable was not significant in the modelwhen studying life insurance demand for wives.220.127.116.11 EducationMost researchers such as Hammond et al. (1967), Ferber and Lee (1980), Burnett and Palmer(1984), Gandolfi and Miners (1996), and Baek and DeVaney (2005), agreed in their research thatthere is a positive relationship between education and life insurance demand. They recognizedthat those who have a better education will purchase more life insurance, potentially due to thefact that households with greater education can expect their incomes to continue to increase at afaster rate and for a longer period of time.Using the 2001 Survey of Consumer Finance data, Baek and DeVaney (2005) examined theeffect of human capital, bequest motives, and risk on term and cash value life insurancepurchased by households. They explained this positive relationship was due to a greater loss ofhuman capital when the household head dies. Households with a head with greater educationhave potentially higher incomes. The death of such a household head will bring more financialloss to the family as compared with those with lower education. Hence, the purchase of lifeinsurance for those with greater education increases as the value of the lost human capitalincreases. Anderson and Nevin (1975), however, found a negative association between educationand the amount of life insurance purchased. The authors explained that higher educated peoplemay believe that inflation often decreases the cash value of life insurance from a savingsstandpoint and hence declines their need for life insurance.18.104.22.168 Family size or number of childrenFamily size and number of children were found to be significant explanatory variables fordetermining the demand for life insurance in many studies (Hammond et al., 1967; Ferber andLee, 1980; Burnett and Palmer, 1991; Showers and Shotick, 1994). Burnett and Palmer (1991)employed a dollar amount of total individual life insurance including term, whole life andendowment as a dependent variable. Using Multiple Classification Analysis (MCA), three
31. demographic variables were found to be statistically significant in their association with theamount of life insurance. Number of children was one of positive significant variables. Burnettand Palmer noted that as the number of children increased, the amount of insurance purchasedalso increased. This is as expected with households with more children having a greater demandfor financial resources if the household head dies.Showers and Shotick (1994) examined the positive relationship between family size and lifeinsurance purchased in their 1994 study. They found that when household size is added by oneperson, on average, the need for life insurance will have a corresponding increase in insurancepremiums of $28.58. In contrast, Anderson and Nevin (1975) obtained the result that there is nosignificant association between family size and the purchase of life insurance using the data ofConsumer Decision Processes 1968-1922.214.171.124.4 EmploymentPrevious studies have consistently conclusion that, if household heads or husbands are employed,more life insurance will be purchased by individuals or households. These studies‘ authorsinclude Hammond et al. (1967), Mantis and Farmer (1968), Duker (1969), Ferber and Lee(1980), and Fitzgerald (1987). Fitzgerald (1987) developed a one period model of the amount oflife insurance purchased by a married couple with data from the Wisconsin Assets and IncomeSurvey (1946-1964). The dependent variable in this study was the face amount of life insuranceheld by the husband. The results showed that occupation of husband had a positive impact on theamount of life insurance purchased. Gandolfi and Miners (1996) found that the wife‘semployment status has a negative impact on the husband‘s life insurance ownership. Theyargued that full-time labor force participation by the wife reduces the husband‘s life insurancedemand. The analysis of Baek and DeVaney (2005), however, indicated that labor forceparticipation by the wife enhanced the purchase of both cash value and term life insurance of thehousehold.126.96.36.199 Other demographic factorsJust two research articles have examined the influence of health status or life expectancy on thelife insurance purchase. Zhu (2007) studied an individual‘s choices on the purchase of lifeinsurance and the purchase of stocks using one-period and two-period models. Zhu argued thatwhen an individual decided the purchase of life insurance and stocks, he or she would consider
32. his or her personal circumstances, such as wealth, future income, health status and survivalprobability, attitudes toward risk and bequest. Zhu found that an increased survivor probabilityencouraged the individual to hold more life insurance. Similarly, Baek and DeVaney (2005)showed that a household with a healthy head spends more on life insurance expenditures.Marital status has also been found to strongly affect both household and individual life insurancedemand in previous studies (Hammond et al., 1967; Mantis and Farmer, 1968) Mantis andFarmer (1968) were among the first to examine how marital status influences life insurancedemand of households. Multiple linear regression analysis was used on data obtained from theLife Insurance Fact Book (1929-1964). Premium expenditures were used as the dependentvariable to see if there was an association with six demographic independent variables.Hammond et al. (1967) also investigated the relationship between life insurance premiumexpenditures and various demographic characteristics of households. Marital status and racewere included among the independent variables. The authors believed that race mirrored somecultural differences, such as attitudes toward death, family, individualism, and risk aversion.These differences may explain some variation in premium expenditures among households.Using the cross-sectional data, they found that marital status was negative and significant andrace was not significant in the multiple linear regression analysis where premium expenditurewas the dependent variable.2.11.2 Economic Factors188.8.131.52 IncomeIncome is commonly found to be positively related to the demand for life insurance, holdingother factors constant. The effect of current income on life insurance demand is examined innumerous studies (Duker 1969; Ferber and Lee, 1980; Truett and Truett, 1990; Showers andShotick, 1994; Gandolfi and Miners, 1996). Showers and Shotick (1994) used a Tobit analysis toanalyze the effect of household characteristics on the demand for total life insurance with datafrom the Consumer Expenditure Survey in 1987. The dependent variable used was premiumexpenditures on life insurance products. They assumed that life insurance was a normal good.The Tobit analysis indicated that a positive relationship existed between income andexpenditures on life insurance premiums. They explained that as income increased the household
33. has a motive to buy more life insurance because life insurance is bought as a function of theincome replacement needed in the event of unexpected death of the major wage earner.184.108.40.206 Net worth or wealthThere are inconsistent conclusions in previous research regarding how net worth or wealthaffects life insurance purchase decisions. Some authors believed there is a positive relationshipbetween net worth or wealth and the demand for life insurance (Duker, 1969; Anderson andNevin (1975); Hau, 2000) since life insurance might provide protection for households‘ wealth.Using the data from the Panel on Consumer Decision Processes (1968-1971), Anderson andNevin investigated the variables associated with the amount and type of life insurance purchasedby a sample of young newly-married couples. The data were analyzed through MultipleClassification Analysis (MCA). There were two dependent variables in their study. One was theamount of life insurance purchased which was a continuous dependent variable measured indollars. The other dependent variable was the type of life insurance purchased which is a dummydependent variable, with ―0‖ indicating cash value insurance and ―1‖ indicating term insurance.The results of MCA showed that net worth was a positive and significant factor in explainingboth the amount of life insurance purchased and the purchase of term life insurance. Conversely,some studies support the conclusion of negative association between net worth and the purchaseof life insurance arguing that the households with higher net worth or wealth have greatercapability to hedge against the financial loss that may follow the primary earner‘s prematuredeath (Fortune, 1973; Lewis, 1989). Lewis viewed household demand for life insurance from theperspective of the beneficiaries. He thought that life insurance was chosen to maximize thebeneficiaries‘ expected lifetime utility. Using the data from LIMRA survey in 1976, Lewis foundthat net worth of the household was negatively associated with the demand for life insurance,when premiums for life insurance were the dependent variable.220.127.116.11 The rate of interest and inflationSeveral researchers have examined whether consumers are sensitive to market rates of interestwhen making life insurance purchases. Headen and Lee (1974) indicated that the interest rate hasa different effect on the demand of insurance depending on whether it is in a short or a long runsituation. In the short run, the demand increases with higher interest rates, whereas in the long
34. run, the interest rate has no obvious influence on the demand for life insurance. In another paper,Pliska and Ye (2007) found that a wage earner buys less life insurance as the interest rateincreased. They reasoned this result was due to the wage earner tending to spend less onconsumption including buying life insurance and saving more money for the future as interestrates increase. Inflation has also been studied as a factor in the life insurance purchase decisionand has been found to not be significant factor in the demand for life insurance (Neumann, 1969;Chang, 1995).18.104.22.168 HomeownershipIt is widely believed that homeownership is positively related to the amount of life insuranceheld (Anderson & Nevin, 1975; Ferber and Lee, 1980; Gandolfi and Miners, 1996). Gandolfi andMiners estimated the influence of income and the value of household production on the amountof life insurance purchased for both husbands and wives and investigated whether the influencediffered by gender. The data in their study was collected by the American Council of LifeInsurance (ACLI) and the Life Insurance Marketing and Research Association (LIMRA) in1984. Husbands and wives were examined separately and total, group, and individual lifeinsurance were used as three separate dependent variables in the Tobit model. They did notseparate term policies from cash value policies due to the data limitations. The analysis indicatedthat home ownership was strongly positive in all the equations for both husbands and wives.2.11.3 Psychographic Factors22.214.171.124 Risk aversionThe research on how risk aversion relates to the demand for life insurance is varied. It isexpected that the greater a household‘s risk aversion, the greater their incentive to buy lifeinsurance. This point is supported in the studies of Burnett & Palmer (1984), Baek and DeVaney(2005), and Zhu (2007). In Baek and DeVaney‘s study, attitude toward risk was measured by thequestion: ―Which of these statements comes closest to the amount of financial risk that you arewilling to take when you save or make an investment?‖ The analysis of Baek and DeVaneyshowed that above-average risk takers were more likely buy term life insurance than those whopreferred taking average risk. Also, those who take average risk hold 10% more cash value lifeinsurance than those who take no risk. However, Greene (1963) measured the attitude toward
35. risk by twenty questions and used the index for these questions. He found no significantrelationship between risk attitude and insurance purchase behavior.126.96.36.199 Other psychographic factorsUsing consumer panel data from a mid-sized southwestern city, Burnett and Palmer (1984)explored 14 psychographic factors, such as work ethic, self esteem, community involvement,fatalism, socialization preference, religious salience, and so on, as influential in determining lifeinsurance demand. They found that life insurance is related with personality traits of individuals.The results showed that if people are self-sufficient and believe that they are in control of theirown well being, they will buy more life insurance. Other interesting results include: people whoare more likely to own life insurance purchase are individuals who are not opinion leaders, arenot price conscious, are not information seekers, and are low in self esteem.2.12. Life insurance policies available at Ethiopian Insurance Corporation1. Endowment Anticipated Endowment Policy (with profit) Children‘s Education Policy (with profit) Endowment Annuity2. Medical Individual Medical Assurance Group Medical Assurance Executive Medical Assurance Travel health insurance3. Term Individual Term Life Assurance Regular Term Life Assurance Modified Large group Term Life Assurance Mortgage Protection Assurance
36. 4. Whole Life Assurance(A Bi- annual Magazine of EIC. Medin No. 30, August 2011).
37. Chapter Three 3. Research methodology 3.1 PopulationThe population for this specific study was all house holds dwelling in Nekemte town whosemonthly income is above one thousand five hundred. 3.2 Data requirementThe required information and data has been gathered from primary source. Here the materialused for collecting data was schedule type of questionnaire. The schedule contains bothsubjective (open ended) and objective (close ended) questions. 3.3 Sample sizeIn determining sample size the researcher evaluated several methods such as, traditionalinferences, personal judgments, budgeting approach and Bayesian status approach. Among themethods personal judgment has been selected and used, to make the conditions flexible for achange if needed. Total number of house holds in the town is 20,870 and only 200 householdswhose monthly income is greater than 1500 was selected to respond to the questions.
38. 3.4 Sampling procedureSince gathering data from the whole population is impossible, sampling has been the onlychoice. Stratified random sampling is preferred so as to give equal chance for house holds fromdifferent kebeles, age range, and sex and from different religions in the study area. Thepopulation has been stratified based on sub cities. The town has six sub cities and the number ofrespondent house holds taken from each stratum was as shown in the following table.S.no Name of sub city Number of house holds Sample1 Cheleleki 3,695 352 Burka Jato 3,887 373 Kasso 2,779 274 Bake Jama 2,241 215 Darge 3,997 386 Bekenisa Kesse 4,271 42Source:- population and housing census report, Aug 2010, A.A 3.5 Source and methods of data collectionThe schedule as a material of data collections is selected because it is less costly, convenient forall, free from bias. The data has been gathered from primary source. Four enumerators wasemployed because of vast area of the study and because it was too difficult to collect data fromdifferent house holds in different higher and kebeles within a short period of time. 3.6 Data processing and analysisThe collected data was edited for minor errors, coded and classified to have organized andclassified data into similar characteristics that makes the information ready for analysis.Descriptive statistics has been used for analysis. In this phase respondents remark about variousfactors affecting house holds demand for life insurance was carefully investigated. This has beenmade by sorting, tallying by hand, pencil, pens and calculators. SPSS was not used for thisanalysis because of lack of accessibility and because it was not supported by researchers PC.
39. Percentages are used to express the result relative to relevant variables considered in order tomake comparisons on trends overtime and among categories. The interpretation focused on onlyresults relevant to the study. 3.7 Methods of presentationData has been summarized and presented by means of tabulations and set of percentages. Theresult of the analysis has been interpreted carefully to reach on certain conclusion about whatfactors play very important role in the life insurance policies purchase and to evaluate the factorsunderlying consumer perception towards investment in life insurance and individuals viewstowards life insurance.
40. Chapter Four 4. Analysis, Description and InterpretationThis chapter is concerned with analysis, description and interpretation of the data collected fromthe sample population. The analysis, description and interpretation of each of the responses weredone one after the other under the given subtitle. In summery the research project conducted toassess various factors affecting house holds demand for life insurance in Nekemte town in Marchand April 2012 was brought with the following results.4.1 Respondents personal profile4.1.1 Age of respondents4.1.1 Age of respondents S.no Age span frequency percentage 1 18-25 0 0 2 26-35 59 29.5 3 36-45 88 44 4 Above 45 53 26.5 Total 200 100Table 1.1 Classification of respondents based on ageAccording to the above table, 44% of the total number of respondents is between age lain of 36-45. 29.5% of the total number of respondents is between age lain of 26-35. The rest 26.5% oftotal number of respondents is above age 45.The age spans of all respondents well lain above 26 as indicated in the table. This means allrespondents are matured enough to respond to the question provided for them and can answer thequestions even by adding their own experience since they are house holds.
41. 4.1.2 Sex S.no sex frequency percentage 1 Male 166 83 2 Female 34 17 Total 200 100Table 1.2 Classification of respondents based on sexThe above table shows that 83% of the total number of respondents was male and the rest 17%was female respondents.The data obtained show that majority of the respondent were male house holds. Even though theresponsibility of male house holds and female house holds with regard to their family is similar,male house holds with regard to the issue raised are believed to have greater exposure thanfemale house holds do. This means the respondents can give proper answer to the raisedquestion.4.1.3 Marital status of respondents S.no Marital frequency percentage status 1 Single 0 0 2 Married 188 94 3 Divorced 2 1 4 widowed 10 5 Total 200 100Table 1.3 Classification of respondents based on marital statusThe table shows that 94% of the respondents are married, 5% of them are widowed and the rest1% is divorced. So majority of the respondents are married, few of them are divorced andwidowed. This means almost all of the respondents have dependents and hence, they can easilyunderstand the importance of life insurance in their own career than others.
42. 4.1.4 Occupation of respondents S.no Occupation frequency percentage 1 Civil 146 73 servant 2 Merchant 37 18.5 3 Farmer 7 3.5 4 Others 10 5 Total 200 100Table 1.4 Classification of respondents based on their occupation.From the above table 73% of the total number of respondents are civil servant, 18.5% of the totalnumber of respondents are merchants, 3.5% of them are farmers. The rest 5% responded others(religious men, business owners, private workers).This shows that the respondents were from different occupational back ground. This means therespondents can appear with different know how, experience, and exposures with the issue underconsideration and hence, they can see the problem from different angles.3.1.5 Educational level of respondents S.no Educational level frequency percentage 1 Illiterate 0 0 2 1-6 0 0 3 7-8 2 1 4 9-12 8 4 5 Certificate 22 11 6 Collage diploma 78 39 7 Degree and above 90 45 Total 200 100Table 1.5 Classification of respondents based on their educational level
43. The above table shows that, 45 of the total number of respondents achieved educational level offirst Degree and above, 39% of the total number of respondents achieved Collage diploma, 11%of them achieved certificate. The rest 5% completed primary and high school level.The minimum educational level achieved was 7-8, where as the majority of the respondentsachieved higher educational level more than 84% of the respondent house holds achieved collagediploma and above. This means the respondents are literate and educated. They can successfullyunderstand the question and easily give appropriate responses.4.1.6 Religion of respondents S.no Religion frequency percentage 1 Christian 136 68 2 Muslim 53 26.5 3 Others 11 5.5 Total 200 100Table 1.6 Classification of respondents based on their religionAccording to the above table, 68% of the total number of respondents was Christians, 26.5% ofthe total number of respondents was Muslims and the rest 5.5% responded others (Wakefata andpagan).Religion matters much in this issue, this means, as the respondents are fellows of differentreligions, they hold different doctrinal opinions with regard to the purchase of life insuranceprotection. So, since the respondents are from different religious back ground, they can offerimportant information on the issue under consideration
44. 4.1.7 Monthly income of respondents S.no Monthly income frequency percentage (ETB) 1 Below 500 0 0 2 Between 501-1000 0 0 3 Between 1001-1500 0 0 4 Between 1501-2000 96 48 5 Between 2001-3000 72 36 6 Above 3001 32 16 Total 200 100Table 1.7 Classification of respondents based on their family monthly incomeFrom the above table, 48% of the total number of respondent‘s monthly income wasbetween1501-2000, 36% of the total number of respondent‘s monthly income was between2001-3000. The rest 16% of the total number of respondent‘s monthly income was above 3001.(All scale described in ETB i.e Ethiopian Birr).This means the monthly income of all respondents lain above 1500. With the assumption that―there is a positive relationship between income and life insurance‖ (shown in literature reviewpart) and the respondents have better income in the town, they are expected to recognize lifeinsurance as a product at least once in their experience. Hence, they can also give better responsethan lower income house holds.
45. 4.2 Life insurance related personal questions 4.2.1 House holds awareness S.no Aware frequency percentage 1 Yes 44 22 2 No 136 68 3 Neutral 20 10 Total 200 100 Table 2.1 Analysis of house holds awareness about the availability of life insurance product in the town.According to the above table, 68% of the total number of respondents is not aware about theavailability of life insurance product in the town, 22% of them are aware and the rest 10%remained neutral to the question.This means majority of the house holds in the town are not aware about the availability of lifeinsurance product in the town. Consumer awareness as a concept of universal concern for allsectors in an economy is very crucial. It is the main spring of demand creation which runs thewheels of the industry. This study indicated, there existed huge untapped market potential for lifeinsurance in the town. This may not mean that house holds don‘t need life insurance. 4.2.2 Availability of insurance company in respondent‘s kebele. S.no Available frequency percentage 1 Yes 39 19.5 2 No 91 35 3 Neutral 70 45.5 Total 200 100 Table 2.2 Analysis of the availability of insurance company in respondent‘s kebeleAs shown in the above table, 45.5% of the respondents remained neutral to the question, whereas19.5% responded Yes, it is available and the rest 35% responded No, it is not available.
46. This means only few house holds can get insurance company in their surrounding /sub city. Thismay even be one of the factors for less awareness of house holds about availability of lifeinsurance in the town. The availability of life insurance business around the living areas of onesmay create awareness about insurance in that person in such away that it affects the attitude ofindividuals towards life insurance positively. According to the data collected only few households i.e. 19.5% of the house holds in the town gets insurance company in their surrounding. 4.2.3 Life insurance purchase S.no Purchased frequency percentage 1 Yes 0 0 2 No 194 97 3 Neutral 6 3 Total 200 100 Table 2.3 Analysis of life insurance purchaseAccording to the above table 97% of the total number of respondents have no life insurancecoverage, and the rest 3% remained neutral to the question. No household responded that he/shebought life insurance yet.This shows that, surprisingly almost all of the house holds in Nekemte town have no lifeinsurance coverage. It definitely proved the statement which say‘s ―In Nekemte the averageselling and purchase of life insurance is very low‖ in problem statement. It means that households are putting the financial future of their families at risk, should they lose their job, fall ill orpass away. Perhaps unsurprisingly, it is single parent families that are most vulnerable.As Hofstede (1995) stated, ‗the major function of life insurance is to protect against financialloss from loss of human life. Besides covering the risk of death, it also covers the risks ofdisability, critical illness, and superannuation‘. Life insurance is therefore developed on theconcept of human life value (Sayin, 2003).
47. 4.2.4 House holds attitude S.no Attitude frequency percentage 1 Positive 41 20.5 2 Negative 61 30.5 3 Neutral 98 49 Total 200 100 Table 2.4 Analysis of house holds attitude/ out look towards life insuranceAs indicated in the above table, 49% of the total number of respondents have neutral attitude/outlook towards life insurance, 30.5% have negative attitude towards life insurance and only therest 20.5% of the total number of respondents have positive attitude towards life insurance.Majority of the house holds in Nekemte town have negative attitude towards life insuranceproduct. A large portion of the population are neutral (not positive, not negative) towards lifeinsurance and only a smaller portion of the population have positive attitude. This means they donot like the product and they do not normally think of buying life insurance unless they needsome push from the marketer.Purchase (behavioral) intention is a function of attitude toward the behavior in question and thesubjective norm. Attitude toward the behavior is the degree to which the person has a favorableor unfavorable evaluation of the behavior in question. Subjective norm is the influence ofperceived social pressures in respect to performing or not performing the behavior in questionand the individual‘s motivation to comply with these pressures (Ajzen and Fishbein, 1980).4.2.5. Reasons for non consumption of life insurance by the house hold.In general the response of the respondents with regard to, ―why they haven‘t purchased lifeinsurance yet is summarized under the following three major categories (issues) 1. Financial capacity issue
48. Financial shortage or lack of capital to pay premium was responded by 46% of the totalnumber of respondents. As described by the majority of the respondents, many house holdsin the town live in hand to mouth life, and therefore they are not capable of paying premiumsand they can not afford to buy life insurance.2. Religion issueAnother 24% of the total number of respondents responded that religion is the most factor orconstraint for non consumption of life insurance. According to these respondents, thepurchase of life insurance contradicts with their doctrine and being insured for their life isconsidered as a sin and for bidden by the doctrine of their religion. These respondents mottois ―God is my protector‖ and they believe that buying life insurance is unfaith fullness inGod.3. Awareness issueAwareness related issues were raised by many respondents that, they were not aware aboutthe availability of life insurance product in the town and they have no knowledge about lifeinsurance and how it works.4. Priority issueThe rest respondents responded that, life insurance is not high priority compared to the otherexpenses they have. These respondents describe that, life insurance is not basic need to befulfilled and there are so many expenses prior for buying life insurance.
49. 4.3 Life insurance related general questions 4.3.1. Factors for life insurance purchase decisionsAccording to the literature review studies on life insurance purchase decisions, the demographic,economic and psychographic factors found to be the most robust in predicting life insurancedemand was the focus of this review. The research results agree with the literature data as shownin Table 3.1 below.S.no Factors Strongly Agree Neutral Disagree Strongly agree disagree1 Demographic Factors a. Age 0% 80% 15% 4% 1% b. Education 55.5% 32.5% 12% 0% 0% c. Family size or number of children 40.5% 51% 1.5% 7% 0% d. Employment 27.5% 44% 28.5% 0% 0% e. Religion 35.5% 59% 5.5% 0% 0%2 Economic Factors a. Income 87% 13% 0% 0% 0% b. Net worth or wealth 23% 19.5% 50% 7.5% 0% c. The rate of interest 36% 27% 25% 12% 0% and inflation d. Homeownership 24% 53.5% 15% 6.5% 1%3 Psychographic Factors a. Risk aversion 38% 36% 14.5% 11.5% 0% b. Lack of awareness 85.5% 14.5% 0% 0% 0% Table 3.1 Summery of major factors for life insurance purchase decisions
50. 4.3.2. Other factors affecting house holds demand for life insuranceAccording, to the data collected from 200 sample respondent house holds, by usingsubjective question which say‘s ―what do you think are other factors that affect households demand for life insurance in the town?‖. The responses of the respondents weresummarized as follows. i. Lack awareness/Lack of knowledge Most of the house holds in Nekemte town are not aware about the availability of life insurance product in the town and others are not even clear with the idea of life insurance. ii. Lack of willingness to buy Some respondents mentioned that majority of the households are not willing to buy life insurance. This could be because they have negative attitude towards the product or because the product is unsought in nature. iii. Less value /Priority/ given during buying According to the data collected from the sample house holds, there are many prior expenses to the purchase of life insurance. This could be because of the financial capacity issue of the households described under major reasons for non consumption of life insurance. iv. Miss conception /Miss information Many peoples perceive it painful to accept, ―we will die some day in the future‖ because they think, they have to die to win. v. Work place condition Riskiness of his/her occupation is also another important factor described in this section. If his/her work place is very risky, household may think of buying life insurance.
51. 4.3.3. Suggestions forwarded by the respondents The last subjective question was the question which say‘s ―what means should be taken in order to minimize these problems or gap?‖ The respondents suggested what they think should be taken as a means to minimize the gap. In general form what the respondents suggested was summarized as follows. - Rising the awareness of people through training depending upon their educational back ground - Giving overall information about life insurance and its activities through different Medias. - Differentiate and announce different types of life insurance at sub cities and kebele level, if possible at house hold level.
52. Chapter five 5. Summery, Conclusion and RecommendationsUnder this chapter the main findings of the study is summarized and recommendations weregiven based on the conclusion.4.1 Summery and ConclusionsIn this part of the study major findings based the analysis made in chapter three a summarized asconclusions.The study was undertaken to assess factors affecting house holds demand for life insurance inNekemte town. A sample of 200 respondents whose monthly income is above 1,500 was selectedamong resident house holds of the town, to gather information.In determining sample size, the researcher used personal judgment method. Personal judgmentwas preferred among other techniques because it reduces the cost of the research and also makesthe researcher understandable.The researcher used schedule type of questionnaire to collect data from the selected samplepopulation and minor editing were done when needed. Schedule were selected because of itscompetitive advantages over self administered questionnaire and interview solely.The respondents were randomly selected to respond to the schedule and four well trainedenumerators participated in data collection. The researcher administered careful managementduring data collection.In analyzing and disclosing the facts and opinions obtained from the respondents throughschedule, percentages and tabular presentations were used.
53. Thus the findings are summarized below:-  Households awareness about the availability of life insurance in the town The result showed only 22%of the total number of respondent are aware. The larger portion i.e, 68% of the total number of respondents is not aware and 10% of the total number of respondents responded neutral. This factor play very important role in the purchase of life insurance by the households.  Availability of insurance company in the respondents kebele The result of this analysis showed that, majority of the respondents (45.5%) do not know i.e. they were neutral. The next largest portion responded that, no insurance company is available in their kebele. While few portion of the respondents (19.5%). Responded yes, insurance company is available at their kebele. This may play a role in house holds awareness about life insurance business in the town.  Respondent‘s participation in life insurance policy purchase Surprisingly no house hold responded that he/she has purchased any type of life insurance coverage. As a result of this, no respondent attended the 4th and 5th questions under life insurance related personal questions.  Attitude (out look) of respondents towards life insurance The study indicated that only 20.5% of the total number of respondents have positive attitude towards life insurance product, cohere as the larger portion i.e. 79.5% of the total number of respondents have negative and neutral attitude towards the product. Neutral stands for not negative, not positive state.  The major reasons for non-consumption of life insurance by the house holds According to the data collected the following are the major reasons for non- consumption of life insurance product. Financial shortage /lack of capital Religion Lack of knowledge or awareness
54. Non- priority of the product as compared to other products.There are so many reasons for non consumption of life insurance products by the house holdersdwelling in Nekemte Town but the above listed reasons are the major ones.  Factors for life insurance purchase decisions According to the data gathered on this issue, which was adopted from literature review part, majority of the respondents agree as the listed factors are strongly determinant factors and considerable in life insurance purchase decisions. These factors are :- 1. Demographic Factors (Age, Education, Family size or number of children, Employment, Religion) 2. Economic Factors( Income , Net worth or wealth, The rate of interest and inflation, Homeownership) 3. Psychographic Factors (Risk aversion, Lack of awareness)  Other factors that affect households demand for life insurance in the town As per the data collected, in addition to the above objective factors the respondents listed the following reasons:- Lack awareness/Lack of knowledge Lack of willingness to buy Less value /Priority/ given during buying Miss conception /Miss information Work place condition  Finally, the respondents forwarded their comments on how to minimize the problems or the gap between insurance companies and the house holds, all the comments revolves around one core point which says raising awareness and knowledge of the house holds through training and providing overall information about life insurance and its activities
55. through different Medias. Advertisement on different medias may not give detailedexplanation about what life insurance mean, when, why, how it works and theresponsibilities they take and the clients responsibility in order to get the servicesprovided by them. As a result many individuals are confused about the companies‘objectives.Solving this problems help the insurance companies to successfully operate and achievetheir objectives. However solving such problem may not be an easy task. A number ofchallenges are there but the companies should apply their efforts and maximum of theircapacity to over come the uncertainties.
56. 4.2 RecommendationsOn the basis of the findings and conclusions drawn from the study, possible recommendationswhich are feasible and relevant to avoid or minimize the gap between Life insurance businessand the households, or to tackle the problems that challenge the operation of the business. 1. As the attitude of most of the house holds in the town towards life insurance is Neutral and Negative, First the insurance companies should work to change house holds attitude towards the product. This is possible through offering detailed and general information about what life insurance mean, its objectives, and services provided by the company. It may change the attitude of people to some extent and creation of awareness indirectly takes place. Thus marketing communication objectives should be based on creating awareness, inform of the benefits inherent in life insurance and to reinforce the purchasing decision. 2. The Life insurance premium to be paid by the insured‘s should be set as economical as possible because the many house holds specified shortage of finance/ lack of capital to be insured. This helps the insurance companies to attract more number of clients and make spreading of loss caused by particular risk over a number of persons possible. In economics, ―The lesser the premium price, the higher will be the demand for the product and the higher the price the lower the demand will be, the law of demand‖. 3. Life Insurance services providers will, therefore, have to introduce proactive strategies that are primarily aimed at educating households and encouraging greater usage of life insurance. And also, the company should expand this study nationally to over come limitations faced by the researcher in the study.
57. Reference/ Bibliography 1. Adelmann, R.L. (1990). Personal financial planning. The CPA Journal, 60(1), 72-73. 2. Ajzen, I. and Fishbein, M.A. (1980) Attitudes and the Attitude–Behaviour Reasoned and Automatic Processes, published in W.Stroebe and M. Hewstone (Eds.) European Review of Social Psychology. John Wiley & Sons 3. American Council of Life Insurers (October, 2007). 2007 life insurers fact book. Retrieved March 12, 2008, from http://www.acli.com/ACLI/Tools/Industry+Facts/Life+Insurers+Fact+Book/GR07- 079.htm 4. Anderson, D. R., & Nevin, J. R. (1975). Determinants of young marrieds‘ life insurance purchasing behavior: an empirical investigation. Journal of Risk and Insurance, 42, 375- 387. 5. Anderson, Feldman Judy and Robert Brown. (2000), ―Risk and insurance‖, published by Education and Examination Committee of the Society of Actuaries. 6. Baek, E., & DeVaney, S.A. (2005). Human capital, bequest motives, risk, and the purchase of life insurance. Journal of Personal Finance, 4(2), 62-84. 7. Baldwin, B. G. (1995). Variable universal life: The ―Swiss army knife‖ of financial planning. Journal of the American Society of CLU & ChFC, 49(3), 22-25. 8. Black, K. and Skipper, H.D. (2000) Life and Health Insurance, Upper Saddle River, NJ; Prentice-Hall 9. Browne, M.J. and Kim, K. (1993) ‗An international analysis of life insurance demand‘, Journal of Risk and Insurance, Vol. 60 No 4, pp. 616-634 10. Campbell, R.A. (1980). The demand for life insurance: An application of the economics of uncertainty. Journal of Finance, 35(5), 1155-1172. 11. Carney, R.J., & Graham, L. (1998). A current look at the debate: Whole life insurance versus buy term and invest the difference. Managerial Finance, 24(12), 25-40.
58. 12. Cunningham, W.P. (1995). Variable universal life: Product, sales ethics and historical perspective. Journal of the American Society of CLU & ChFC, 49(4), 78-85.13. Fitzgerald, J. (1987). The effects of social security on life insurance demand by married couples, Journal of Risk and Insurance, 54, 86-99.14. Fortune, P. (1973). A theory of optimal life insurance: development and tests. The Journal of Finance, 27(3), 587-600.15. Gandolfi, A.S., & Miners, L. (1996). Gender-based differences in life insurance ownership, Journal of Risk and Insurance, 63, 683-693.16. Garman, T.E., & Forgue, R.E. (2006). Personal finance. (8th ed.). Boston: Houghton Mifflin Company17. Haile Michael Kumsa (1987). Development of insurance in Ethiopia – (page 30-36)18. National Bank of Ethiopia (2000), insurance, the risk transfer technique Birritu, (No.77)19. National bank of Ethiopia (1996)- Birritu, No 62Addis Ababa20. Omar, O.E. and Owusu-Frimpong, N. (2007) ‗Using the theory of reasoned action to evaluate consumer attitudes and purchase intention towards life insurance in Nigeria‘, The Service Industries Journal, Vol. 27 No. 7, pp. 1-1421. Rejda, G. E. (2004). Principles of risk management and insurance. (9th ed.). New Jersey: Pearson Education.22. Triesch mans. Gustoveson (1981). Risk management and insurance23. William C. and Heins R. (1981). Risk management and insurance. United States of America, congress library pub. (page 22-23)
59. WOLLEGA UNIVERSITY SHOOL OF GRADUATES STUDY MBA PROGRAMThis schedule type of questionnaire is prepared in order to get the necessary information aboutfactors that affect house holds demand for life insurance in Nekemte Town. The information willbe obtained from house holds and will be used only for academic purpose. The researcher wouldlike to thank in advance for your cooperation in answering this schedule.PART-I. RESPONDENTS PERSONAL PROFILE Kebele____________ Sub city ______________1. Age: a. 18-25 yrs. b. 26-35 yrs c. 36-45 yrs d. 45+ yrs2. Sex: a. Male b. Female3. Marital status: a. Single b. Married c. Divorced d. Widowed4. Occupation: a- Civil servant b. Merchant c- Farmer d- Others____________5. Educational level: a. Illiterate b. 1-6 c. 7-8 d. 9-12 e. Certificate f. Collage diploma g. Degree and above6. Religion: a. Christian b. Muslim c. Other _____________7. Family (monthly) income (in ETB):
60. a) Under 500 b) Between 501 - 1000 c) Between 1001 -1500 d) Between 1501 - 2000 e) Between 2001 - 3000 f) Above 3001PART-II. LIFE INSURANCE RELATED PERSONAL QUESTIONS1. Are you aware about the availability of life insurance product in the town? 1. Yes 2. Neutral 3. No2. Is there any insurance company in your sub city? 1. Yes 2. Neutral 3. No3. Have you purchased any life insurance policy/ contract? 1. Yes 2. Neutral 3. No4. If your answer to question number 3 is yes, what type of life insurance cover did you bought? 1. Term life insurance 2. Whole life assurance 3. Endowment 4. Medical Other insurance type. _________________________5. If you have purchased life insurance, to which insurance company are you insured? 1. Ethiopian insurance corporation 3. Oromia insurance 2. Awash insurance company 4. Nyala Insurance6. What is your outlook towards life insurance? 1. Positive 2. Neutral 3. Negative7. If your answer to question number 3 is No, why?
61. ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ _________________________.PART-III. LIFE INSURANCE RELATED GENERAL QUESTIONS1. Please tick in the box describing the extent of agreement/disagreement (with the factors youthink will most affect the households demand for life insurance.S.no Factors Strongly Agree Neutral Disagree Strongly agree disagree1 Demographic Factors f. Age g. Education h. Family size or number of children i. Employment j. Religion2 Economic Factors e. Income f. Net worth or wealth g. The rate of interest and inflation h. Homeownership3 Psychographic Factors c. Risk aversion d. Lack of awareness
62. 2. What do you think are other factors that affect house holds demand for life insurance in thetown? List them according to their priority! a. ________________________ d. ________________________ b. ________________________ e. ________________________ c. ________________________ f. ________________________3. What means should be taken in order to minimize this problems/gap? __________________________________. _______________________________. __________________________________. _______________________________ . ___________________________________. _______________________________.