Role of Information Sources in Selection of Life Insurance Schemes: An Empirical Study of Policyholders

TLDR: In this article, the authors present the components of sources of information, which act as selection criteria for purchase of insurance, including literature and advertising, professional recommendations, and return performance.

Abstract: Empirical financial research treats sources of information as an important determinant for selection or purchase of financial services. Sources of information provide information for other selection factors and themselves acts as selection factors also. However the academic literature is very scanty with respect to insurance purchase or selection. This study presents the components of sources of information, which act as selection criteria for purchase of insurance. Primary data collected from 500 respondents, randomly selected from the cities under survey was used to assess the sources of information. Factor analytic technique using varimax rotation procedure resulted in three components namely: 'Literature and advertising'; 'Professional recommendations'; and 'Return performance'. Inferential statistics on Anderson Rubin (AR) factor scores depict the significant differences between various categories, grouped on the basis of demographic, economic and behavioral characteristics. The study adds to the existing literature of life insurance selection and will be of help in improving the marketing strategies of life insurance companies.INTRODUCTION AND REVIEWFollowing the passage of Insurance Regulatory and Development Authority (IRDA) Act in 1999, market driven competition gained much ground as compared to public sector exclusivity in Indian insurance sector. The beginning of this new era saw a phenomenal growth in not only the number of private companies but also witnessed proliferation of new innovative products and new distribution channels. Growing middle class segment, rising income, increasing insurance awareness, rising investments and infrastructure spending have led a strong support to extend insurance services in India. Following this Indian insurance industry witnessed increase in number of life insurance companies from 5 in 2000-01 to 23 in 2010-11; increase in insurance penetration to 4.40% in 2010-11 from 2.15% in 2000-01; and increase in number of issuing new policies from 253.71 lakh in 2002-03 to 481.52 lakh in 2010-11 (Anonymous, 2011).With such an explosive growth, there is a large number of products to choose, ranging from simple vanilla term plan to highly evolved and complex product like United Linked Insurance Plans (ULIPs). Adding to the complexity, with in even one category of say, term plans, there are many schemes from which a choice can be made, thereby making selection decisions are extremely difficult. Therefore such a scenario makes it imperative to study the factors affecting the selection of life insurance policy. With the proliferation of gamut of new products and services, as well as new competitors, life insurers must learn all about the factors that help to attract customers away from their competitors, motivate current customers to purchase insurance and stimulate others to buy the product. Sources of information are very important in knowing about these factors. Study of sources of information is extremely important as on one hand they provide knowledge about selection factors and on the other hand, they themselves acts as selection criteria.Modern finance theory assumes that purchase decision for individual financial asset is made on the basis of investor's anticipation regarding the returns in future and asset risk, and at the same time covariance of these returns with other assets in investor's portfolio (Markowitz, 1959; and Elton and Gruber, 2001). As a result most of the research on financial asset selection and purchase thereof extensively used only return and risk parameters. Later on many of the researchers have considered that purchase or selection of financial service is a part of multi attribute decision among which financial asset return and risk performance is one important part (Cook and Hebner, 1993; Capon et al, 1996 and Campenhout, 2007). With the inputs from different academic researches pointing towards different selection criteria, it is pointed out that there is no single theoretical framework of selection of financial asset (Campenhout, 2007). …