Georgia Knowles and Richard Zhou discuss cultural differences as a driver of life insurance demand, and consider how the industry can use cultural and behavioural psychology to create better products
Life insurance exists to meet customers’ needs through financial protection or savings products. Customer needs differ by life stage, wealth, employment status and government regulation, as well as less tangible factors such as culture. While national wealth may explain an ability to afford insurance, cultural differences such as values, norms and beliefs can inform the perceived need for life insurance. Understanding what drives human behaviour is important for decision-making in all businesses, and particularly those that seek to leverage these drivers to create better products and improve the consumer experience.
Life insurance product development
The product development process helps life insurers to identify and meet the needs of customers. Actuaries are involved in most stages of the process due to their expertise in valuing and understanding the risks associated with uncertain future benefits. Insurers are increasingly recognising the importance of involving behavioural experts, too; for example, innovative US insurer Lemonade employed a world-renowned behavioural economist as chief behavioural officer (CBO) in 2016. A CBO’s role is to integrate aspects of behavioural economics into the business model and lead a people-centric approach to decision-making. Engagement of behavioural and cultural experts is not limited to the financial sector, either:all businesses that work with people can benefit from an improved understanding of human behaviour and cultural difference. As businesses become more diverse, it is essential that they are also inclusive, and understand and accommodate differences.
National culture is an important driver of consumer behaviour. In his 1871 book Primitive Culture, Edward Tylor defined culture as “that complex whole which includes knowledge, belief, art, morals, laws, customs and any other capabilities and habits acquired as a member of society” – a definition that still proves relevant today. While every individual is unique, if we place each person on a multi-dimensional cultural scale we can identify clusters of elements that make up a distinct national culture.
Many researchers and anthropologists have set out to measure these elements, identify correlated variables and define cultural dimensions. The most well-known are the four original dimensions of national culture defined by social psychologist Geert Hofstede: power distance, uncertainty avoidance, individualism vs. collectivism, and masculinity vs. femininity. Hofstede additionally used statistics and data from several global studies to position 76 countries relative to other countries through a score on each dimension.
The effect of individualism
Andy Chui and Chuck Kwok’s 2008 paper for the International Journal of Business Studies, ‘National Culture and Life Insurance Consumption’, found through empirical testing that the dimension most closely related to life insurance demand is individualism vs. collectivism. In individualist societies, members tend to have an independent self view, valuing autonomy and perhaps viewing reliance upon others for help, particularly financial help, as a sign of weakness.
Collectivist societies are defined by high interdependence, with members integrated into strong, cohesive in-groups. Family ties and obligations are strong determinants of behaviour; if one member of a collectivist society dies prematurely, the family group is expected to help their dependents. This collectivist social network security creates less of a need for market life insurance relative to highly individualist societies, in which market-based life insurance is necessary to safeguard the welfare of dependents.
The evolution of life insurance in China
Hofstede’s dimension scores indicate that China is a highly collectivist culture that places value on extended family units spanning generations. Parents are traditionally responsible for raising their children to adulthood, and children are responsible for caring for their parents from retirement to death. A strong emphasis on respecting elders and ancestors gives living members responsibility for bearing the financial burden on an individual’s passing.
“It is important to recognise that cultural differences often result in context-dependent priorities and desires”
China opened its economy to the outside world in the late 1970s under the leadership of Deng Xiaoping and his market economy reforms. The country and its people were eager to embrace Western concepts – shown in the popularity of McDonald’s, Western toys and disco dancing. Seeing these success stories, well-established life insurers such as AIA, Manulife and Allianz were eager to expand into China. Looking solely at economic indicators, the astonishing growth of China’s economy signalled a perfect environment for the development of the life insurance market. However, the products offered and marketed did not initially resonate. This initial failure can be credited to several key differences between Western and Eastern cultures that were unaccounted for:
- Death is a taboo topic in Chinese culture – particularly premature death and misfortunes. Chinese people define a ‘good life’ as living well towards the end of life.
- Chinese people traditionally leave their money to their children, thereby passing wealth down generations. This creates a strong savings mindset.
- There is a large emphasis on respecting elders and ancestors. When an individual dies, it is the responsibility of their family members to take care of such details as their funeral arrangement.
Despite early setbacks, life insurers eventually adapted to China’s distinctive customer needs and attitudes. Instead of selling traditional life insurance protection policies, which conflict with cultural values around premature death, local insurers offered investment-style products that catered to the local consumers’ savings preferences. The local insurers offered three types of popular savings products, which continue to be sold today:
- Investment-style products catering to those preparing for retirement and a ‘good life’.
- Savings-style products as a means of passing wealth down to a family’s only child, due to the one-child policy that was implemented in China from 1979 to 2016.
- Unit-linked products for those with a higher risk tolerance in return for higher profits, spurred by the establishment of the stock market and ‘stock fever’ in the 1990s.
China continues to exhibit strong growth, with a 30.7% per annum average annual real growth of life insurance premium income from 1995 to 2004, compared to GDP growth of approximately 11.5% per annum. There is also now higher demand for traditional risk protection products in China than there was several decades ago, as local companies that offered savings products benefit from a foundation of trust. By paying attention to the cultural differences that drive Chinese attitudes and behaviours, life insurers were able to reduce underinsurance and meet customer needs.
Things to consider
Success in one market does not always translate to success in another market. On identifying the gap in a new market, it is important to recognise that cultural differences often result in context-dependent priorities and desires. This obstacle does not rule out any new market, but creates space for innovation – as demonstrated by the Chinese life insurance market success story.
As the world becomes more multicultural, needs will change within established markets.
Insurers must maintain an innovative mindset when developing products, and should consider the value of engaging behavioural and cultural experts in the process. By better understanding the drivers of attitudes and behaviours, life insurers can continue to provide value and meet the customer needs. While one size will not fit all, we can strive to build an industry that embraces cultural diversity and inclusion.
The opinions expressed are the authors’ own and not necessarily those of their employer.
Georgia Knowles is a senior analyst at PwC in New Zealand
Richard Zhou is a senior analyst at PwC in New Zealand