The Extent of Underinsurance: New Zealand Evidence

Abstract

It has been a common assumption by the insurance industry world-wide that households are under-insured. We examine new evidence for underinsurance using a comprehensive survey of New Zealand households and full life-cycle needs analysis. This survey is unique internationally in that it also covers total and permanent disability, trauma and income protection insurances, as well as examining underinsurance by household type and ethnicity.

We show that analysis of underinsurance needs to be more comprehensive than simple measurement of rates or levels of cover and needs to compare actual coverage levels to adequacy levels. We find no indication that of a crisis in life underinsurance, with rates and levels of life insurance ownership similar to those in the USA and ownership levels correlated to needs for life cover. There is, however, strong evidence that levels of life cover are often poorly chosen, with little relationship between ideal cover and actual cover, indicating household considerations about insurance cover levels are inadequate.

Keywords: personal household behavior, insurance, behavioral finance, ethnicity

JEL Classification: C42, D14, G22, H31, I31