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Underinsurance Ratio Revisited: Trust Cover Level Comparisons, Not GDP Comparisons

Recently we published links to an article on underinsurance. There were many good things in the article, which was good on cover levels but the illustration of premium as a percentage % of GDP figure is a bit misleading, and needs explaining further. The original article is at this blog post if you want to look it up. 

The suspect comparison is this: "New Zealand spends 2.8 per cent of GDP on insurance, compared to the OECD average of 8.4 per cent."

Are kiwis spending only 25% of what they need to? No. We don't think so, and that's not what the sum insured comparisons suggest either. Don't get me wrong, we are spending too little, but not by that much. 

You see there are some key differences between jurisdictions that make comparisons at the level of spending a bit hazardous. Some markets still buy a lot of whole of life and endowment products, which are classified as insurance, but contain big portions of investment as well. In many markets more is spent on more generous accident insurance than our centralised and skinny ACC scheme.The same has to be considered for medical insurance in any group in which the USA figures. Another factor may be differences because GDP per capita is so much higher in some markets, and that allows for higher spending on items such as financial contracts which can expand after basics like food, heat, and accommodation are paid for. 

So we constructed a narrower peer group. By our calculations a more reasonable average excluding markets which are a lot richer and have different structures we get an average closer to 4% of GDP, it is 5% of GDP if the peer group is restricted to the industrialised world. Now our rate looks like it is about one third to one half lower than it should be. For most people in work the most obviously missing benefit, to return to the original article, is income protection. 

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