The Protection Gap Puzzle

The Protection Gap puzzleMuch has been said about underinsurance in various populations. In recent years, this statement has been made about life insurance protection in Singapore (e.g. People of Singapore Found Underinsured) and another Protection Gap Study for Singapore was released. Conscious of the fact that Singapore has a relatively high savings rate, this puzzled me somewhat.

A bit of delving into the report pieced this puzzle together:

1) All the compulsory insurance under the DPS (Dependent Protection Scheme) amounting to roughly SGD100 billion in the CPF (Central Provident Fund) scheme is ignored in the assessment (section 6.3 of the study)

2) Many financial assets owned by the population (in particular cash, shares and property) are ignored in the assessment (section 5.5 of the study)

Let’s say, Mr X, aged 45, has cash in fixed deposits worth SGD200,000, which comprises all his savings over the last 20 years. (For simplicity let’s ignore the CPF scheme.) Let’s say also, his protection need has been calculated to be SGD200,000 now (which includes the oustanding mortgage on his residential property, future family expenses etc). The gap for Mr X, according to the methodology used in the study would be SGD200,000 because the SGD200,000 worth of assets in fixed deposits are simply ignored.

Many of us may reasonably regard the gap for Mr X as being closer to zero, as the ‘savings in fixed deposits’ asset may be used to meet Mr X’s protection needs. Similarly, if Mr X had invested his savings in shares or an investment property etc. instead of the fixed deposits, this could reasonably be used to meet his protection needs. (Of course, it may be debated whether a life insurance policy would have suited Mr X better than these financial assets, to meet his protection needs; however, that need not be a forgone conclusion.)

It is true that in any society there are segments of the population that are underinsured (and in this case, probably some individuals who are overinsured) and it is most useful to assess individual needs carefully. However, to regard a nation as grossly underinsured, while ignoring certain insurances people have and their financial assets seems a little odd. It helps to understand the situation better and put things into perspective.

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