Swiss Re sigma study: millions lack adequate life insurance � significant mortality protection gaps in Australia, Germany, Italy, Taiwan and the US

7 Jul 2004 CET

Millions of consumers around the world lack adequate life insurance protection, according to a Swiss Re sigma study released today. “Mortality protection: the core of life” identifies significant shortfalls in the amount of mortality cover purchased when compared with consumers’ real protection needs. If the protection gap were to be filled, the average amount a family spends on life insurance premiums each year would need to increase by USD 98 to USD 444, depending on the country.

Christian St�ckli, a senior actuary at Swiss Re and co-author of the study commented: “One of the most striking findings of the sigma study is that each country we examined has a substantial mortality protection gap, despite many differences in how national markets operate.”

Significant life assurance protection gaps

Many families are either uninsured or inadequately insured against the death of their primary earners. A measure of this shortfall is the life assurance protection gap – the difference between the resources needed and the resources that would be available to maintain a family’s current living standard after the death of its primary earner. The sigma study estimates the size of the mortality protection gaps of five important markets – Australia, Germany, Italy, Taiwan, and the US.
Each of the five markets studied in the report has a sizeable protection gap, ranging from USD 0.2 trillion for Taiwan to USD 10.6 trillion for the US. Annual premiums needed to close the gaps range from 0.1% to 0.3% of GDP, equivalent to about a half-day’s wage.

Life assurance protection gap, selected countries
Protection gap by country Australia Germany Italy Taiwan US
Gap, in USD billions 474 2,662 640 234 10,576
Missing annual premium,as % of GDP 0.30% 0.30% 0.12% 0.21% 0.23%

Germany, and Italy in particular, show huge potential for an increase in individual term life premiums. An average Italian would have to spend an additional USD 141 per annum, or more than six times the current annual individual term life premium, to meet his or her family’s protection needs. In Germany, an annual premium of USD 359 is required to fill the average protection gap per worker with dependents.

In the US, where the protection gap is USD 10.6 trillion, the average annual premium needed to fill the protection gap is USD 444, or 104% of existing individual term premium. Similarly, Australia needs to lift premiums by 109%, or an average USD 250 per worker with dependents, to close its protection gap.

Developments in mortality protection

In recent years term life assurance has become the preferred form of mortality coverage as many markets have witnessed a shift in consumer tastes away from products that combine savings with mortality protection. Term markets have grown rapidly, but differ widely with respect to size and degree of product development across countries. Mortality coverage per capita from individual term products varies from a high of USD 40 544 in the US to a low of USD 3 531 sum assured in Germany. This variation reflects differences in social security provisions, group insurance coverage, cultural norms and consumer preferences. The report also identifies several key factors that determine demand for life insurance including age, income, affordability, and wealth. Although these factors help explain demand for mortality protection in the aggregate, individual decisions to purchase life insurance appear far less rational.
The study concludes by discussing how insurers, governments and employers can work towards closing the protection gap. Greater workplace education could be complemented by insurance industry initiatives and government incentives. Clarifying how much coverage is needed and how much support is available from social security, existing life insurance coverage and available assets will help each family evaluate its own protection gap. Because governments must sometimes intervene to provide welfare, it may be prudent for them to offer employers and workers tax incentives to encourage adequate mortality coverage.