This report deals with the external factors that are faced by the business organisation. The chosen case study is Aviva. Aviva is a renowned insurance company, which sells both life and general insurance products worldwide. Value added service such as financial services in the form of asset and the company provides pension management. General insurance of Aviva Singapore covers the insurance of car, travel, personal accident and home insurance. Life insurance provided by the company is health insurance, direct purchase insurance and MINDEF & MHI Group Insurance (www.aviva.com.sg, 2016). This company mainly deals with direct sales person or insurance agents, who build a bridge between the company and the customers. Aviva has collaboration with banks, independent vendors and other corporate partners in the business operation. Key priority of Aviva is to stay financially strong and to keep strategic partnership with the shareholders.
Both demand side and supply side factors are discussed in the study. Demand for insurance comes from risk and uncertainty faced by individual. The natures of people are divided into three categories such as risk averse, risk neutral and risk lover person. Demand for insurance is mostly comes from the risk-averse person, who wants to hedge the risk (Clarke, 2016). The demand aspects of insurance companies are analysed through expected utility theory. The supply side effects are also highlighted considering external environment. Pricing is the important dimension that affects the supply of insurance products. Insurance premium is the price of the mentioned product (Zweifel & Eisen, 2011). Insurance supply is the function of expected profit. Supply of insurance is positively associated with the risk bearing capacities. Two external factors affecting business environment such as natural and technological environment have been considered in this study. Climate change has effect on health of insurance and hence has effect on demand for health insurance. Technological factor has influence on the performance of Aviva and supply of insurance.
The market analyst Moody has rated Aviva A1, which signifies as stability of the business operation of Aviva. S&P has also rated this company A1. Stable insurance business increases its demand for products to the customers. Demand for insurance mainly comes from the risk averse person, who wants to diversify the risks to the third party. Demand for insurance is less from the risk loving or risk neutral individual. As stated by Outreville (2015), risk has positive relation with the return as higher risk is associated with higher return, as there is no certainty of money received. As discussed by Haseltine (2013), demand for insurance product depends on their prices such as insurance premium, expected return, individual preferences and budget constraint. As concluded by De Janvry, Dequiedt & Sadoult (2014), demand for life insurance in Singapore depends upon level of education, development of social security pension, child dependency ratio, elderly dependency ratio. Premium and inflation rate affects the non life insurance.
There is no specific theory on insurance product. Demand for insurance product of Aviva is thus depend on the characteristics of the industry and the behaviour of the households. In the view of Jaeger et al. (2013), the determining factors of demand for insurance product are financial development, market structure; characteristics of households, expected price, social security retirements and survivor benefits are the determining factors of the demand for insurance products and services. However, as discussed by Haseltine (2013), affect of climate change or natural disaster is significant to influence demand for insurance product. In this report, the two factors namely human behaviour and climate change has been considered as the two components generating the demand for insurance in Singapore.
Influence of Human Behaviour on Demand:
Human behaviour plays a significant role in generating the demand for insurance within a nation (Ramesh, 2016). Every miniscule decision taken up by a human being involves a complex procedure of decision-making taking into consideration several factors within and outside the economy. The decision to invest on any insurance policy also includes this complex procedure. It has already been stated that people are categorised as risk lover, risk neutral and risk averse. This behaviour in turn is dependent on people’s thirst for gaining utility (Benard et al., 2015).
Figure 1: Utility and Risk Measurement
Source: As Created by the Author
According to Arrow-Pratt measure, the blue line indicates risk neutral, the brown line indicates the utility curve of risk averse and the green line indicates risk-lover person. The risk averse person faces diminishing MU curve whereas the risk lover person has an increasing MU curve (Traeger 2014). This indicates that with increase in wealth, the MU of people increases. For a risk-averse person the opposite scenario happens. These risk-averse persons generate the demand for insurance. They are often guided by their intuition that they might face hardships in their daily life or be facing life risk. Usually demand for insurance from an risk averse person not only comes from the fact that he might be facing difficulties in his own life but also from the fact that he might want to secure the life of other members in his family (Embrechts & Hofert, 2014). A consumer usually takes the help of the concept of inter-temporal budget while considering their decision to invest in any situation. Their decision-making process involves their present income and consumption, their expected future income and their expected future consumption. After taking into consideration of the inter-temporal choice and income as a constraint, people opt for insurance as it acts as lowering the costs of financial distress that they might face (Bakker & Knoben, 2014). It is not only individual person who creates demand for insurance but also the business organizations create a demand in insurance sector. Often business organization opts for a wide range of insurance, starting from insuring their assets against theft, fire and other mishaps. In fact big firms do invest a lot of money in insuring their company depending on the potential vulnerability they expect to face. The decision of firms to secure their business through insurance is a part of coalition of multiple human behaviours and their collusive decision.
Influence of Climatic Condition on Demand:
This report is based on Aviva operating in Singapore. Though the country is situated near Equator, it experiences tropical climate with high level of humidity, moderate temperature and abundant rainfall. Climatic condition also plays a major role in generating the demand for insurance at individual as well as on mass level. On individual level the demand for health insurance increases with degrading climatic condition and on mass level, any organization is expected to generate demand for more insurance of their property and capital. According to a report published in Wall Street Journal (2016), Singapore has been facing air pollution the level of which increased to great extent during the past few months. The forest-fire of Indonesia has been the main reason for the sudden rise in air pollution in the nation. According to the National Environmental Agency the people has been advised to avoid staying outdoor for a prolonged time (www.wsj.com, 2016). This high level of pollution results in severe health issues starting with acute asthma. Other than that the people also faces issues like wheezing, eye irritation, prone to cancer and skin diseases. As a result, people opt for more of health insurance in Singapore. In addition, areas that are prone to natural calamities generate more demand of insurance (Lee, Lee & Chiu, 2013). Hence, it can be said that since the Singaporean economy faces so much issues in their climatic condition due increased level of pollution, therefore, Aviva can expect a high level of demand in insurance market.
As stated by Kunreuther, Pauly and McMorrow (2013), the supply of insurance depends heavily on the expected profit levels. In general the demand and supply of insurance are considered together to understand the market scenario. Supply alone has minimum or no significance in the market. If the supply changes with the demand being unchanged, the equilibrium quantity and price will deviate from its original situation. However, people will not be bothered by the change. For example, if the demand remains unchanged and the supply increases, the price will fall. The general definition of demand states that the fall in price will be followed by increased demand. Nevertheless, in reality, the demand of insurance depends heavily on the psychology of people. If the consumer’s perspective towards insurance remains unchanged, the increased supply of insurance will have no significant effect on the consumers.
There are many factors that affect the supply side of the insurance market. Among these the natural changes and technological changes are considered in the study. The supply of insurance is positively related to the risk bearing capacity of the market agents. This risk bearing capacity depends highly on the insurer capital and surplus. If the surplus is significantly low with low amount of insurer capital, the risk bearing capacity will shrink. This trait will affect the supply side of the insurance market negatively. To understand the supply side of this industry the theory of cycles can be incorporated. It states that the capacity of risk bearing depends on the total capital that the investors are ready to put at risk. The degree of the risk also plays a vital role in determining the supply of the insurance. The process is self sufficient in a way that even if capacity crisis hits the market the inefficiency in the market will raise the price and profits in the market. This will increase the amount of the capital under insurance. Eventually the transaction between the supply and demand in the market will become smooth.
In general, the presence of foreign insurance companies enhances the market capacity. The risk and negativity in the market are distributed across the borders. The process is similar to the way the assets and liabilities are distributed. The technological factor affects the insurance supply the most. As a country or economy’s technology improves it has a trickledown effect to all the sectors. The technological improvement will increase the level of capital in the country. It will require more insurance. The technological improvement will also increase the supplies of insurance. The cost of production will reduce for the insurance companies operating in the country like Aviva. According to the ideas given by Chang, Lee and Chang (2014), it will provide the insurance companies to supply more insurance at the same price as the cost has gone down. Moreover, it will ensure that the profit level will be the same or increase. The technological improvements also help the insurance companies like Aviva in reducing the risks in a deal. With new technology being introduced to the medical industry, recognizing a disease will be easier for the organization. This way the organization Aviva can charge the consumers more accurately. It will help the organization in calculating the risk of a life insurance. Aviva will be able to charge the consumers a premium, which will cover the risks properly. Technological improvements also can help the organization with general insurance. As stated by M?hlnickel and Wei? (2015), the improvements often result in reducing the risks that can be caused by inferior technology.
Again, the level of supply of premium also depends on the level of premium that the companies like Aviva can charge. An older person has to pay more premium than a young person does, as the life expectancy significantly determines the premium level for the consumer and the organization. According to the views given by Liu, Zeng and Yao (2017) technological changes often play an important role in increasing the life expectancy, in which case the premium level will fall. The premium level also depends on the fitness of the customer. The level of premium the customers are willing to pay determines how much the organization will supply.
The insurance industry of Singapore is globally recognized. Since the global financial crisis of 2007 hit the export industry of Singapore the insurance industry has witnessed uncomfortable and rough patches over the last couple of years. As stated by Jinghua (2015), the economic crises have the potential to disrupt the demand and of the insurance industry that once used to thrive. The low interest rate set by the government to get the economy back on track has affected the market badly. The capital requirements have also changed the market dynamics for the insurance companies like Aviva. The government authorities in the country have tightened the regulatory capital requirements as the economy is facing further risks. This phenomenon has reduced the supply of insurance in the country significantly, which negatively affects the organizations like Aviva.
Following the views of Huat and Kuen-Chor (2014), it can be said that, the insurance industry of Singapore is constantly changing due to external factors like economic, environmental, technological, and others. The economy of Singapore is highly affected by the overall Asian market. The economy of Singapore largely depended on the export to the western world. The global financial crisis of 2007 has shaken the world economy, which affected the export industry of Singapore. It reduced the size of the market. Such a crash has created a hollow place in the capital generation process. As stated by Klumpes, Kumar and Dubey (2014), it reduced the demand for insurance. The life insurance in the country comes with high premium rates because of the unhealthy environment of living. The air pollution in the country has reduced the quality of life and life expectancy. Although the medical instruments and technologies in the country are one of the best in the world, the unfavourable environment is the reason the quality of life in Singapore is such low. As stated by Gaganis, Hasan and Pasiouras (2013), this increases the demand for the insurance products that the organizations like Aviva are offering to their customers. It also presents immense opportunity for the organization to capture a large share of the market. However, to increase the market share, the organization has to be able to increase the supply.
According to the ideas of Broke?ov?, Pastor?kov? and Ondru?ka (2014), the global financial crisis left the Singaporean economy in a tough spot. The government of the country has decreased the rate of interest to increase investment. The low interest rate has reduced the return from the long term insurances. The demand for the insurances has thus fallen significantly. As new capitals are entering the market, there are new opportunities in the market. Following the views of Ellis, Chen and Luscombe (2014), it can be said that, the increase in the demand is thus forecasted by several surveys. With the change in the market-dimensions, there are new opportunities in the market for Aviva. The organization can focus more on product designing and development. Customer specific product development will help the organization to grab the attention of the consumers and increase its sales. The organization can use the time while the market is trying to get back on the track. It can offer new policies, which will bring the organization more clients.
Following the views of Lesle et al. (2014), the market of Singapore cannot get rid of the fact that the market is in a place, which has unhealthy environment. The air pollution in the country has risen to such high that after the global financial crisis, the Singaporean government is looking at increasing output but very cautiously as too much emission can break the balance of the nature of the county. It has made the health insurances a must for every person. Moreover, it increased the rate of the premium. At this high level of premium people are not being able to afford insurance. To address those people Aviva needs personalized insurance products and packages. It will help the organization in employing skilled personnel for creating the policies. It will also help the organization to capture a better portion of the market share. The competition in the market is currently high as all the organizations are trying to take advantage of the financial crisis that it has been through recently. Foreign MNCs with more capital are increasing the prices by pushing the equilibrium higher. It is reducing the amount of products that were available at the same price before. Asia as a whole is more prone to natural catastrophes. In last few years, Asian countries like Singapore are responsible for more than forty percent of the total loss by natural catastrophes. Of the total losses in the country, around thirty percent of property was only insured. It raises the question of answering the low rate of using insurances in the country. One of the prime causes behind the low usage of insurance is the high premium rate, which is nearly unavoidable by the organization.
According to the ideas given by Xian, Bo and Zhide (2015), the government policies also play a huge role in determining the equilibrium between the demand and supply of the insurance market. The government of Singapore has to make even distribution of resources to create a development all over the industries. Otherwise, the income inequality in the country will rise rapidly. The demand for insurances is more dependable on the thought process of the customers. If they are more risk averse, the demand for insurance will rise. The supply depends on the how much the organization can provide given the purchasing power of the consumers.
Recommendation & Conclusion:
Throughout the report, the impact of environment on the demand and supply of insurance along with human behaviour has been focused. After analysing, the demand and supply factors influencing the insurance sector few areas have been highlighted which possess a hindrance in the growth of Aviva and insurance sector in general. The things problems and recommendations are as follows:
- It has already been mentioned that pollution and climate is an important component that generates demand for insurance. At the same time premium is an important component determining the supply of insurance. Whenever there is high level of pollution in the environment, it obviously causes health problems. Following the basic logic of business, it is going to be a risk for Aviva to provide insurance to unhealthy person. Henceforth, Aviva and any other insurance company would automatically have to bear the risk of paying back more amount of money to the affected person and so they keep the premium very high. But this has adverse impact on the consumers. Hence, it is recommended that Aviva must try to keep their premium low even while catering to the needs of unhealthy person. They may add extra clause in their terms and condition for payback to avoid the risk of paying more to their clients than actually earned by the company.
- Singaporean economy is under re-construction after the global financial crises of 2007-08. It has seen high growth in their economy and henceforth it is recommended that Aviva as the insurance company must try to design different kinds of policies to attract more clients. It has been observed that Aviva still do not offer policies that safeguards the Singaporeans from natural calamities and disaster. However, this is not much required given the statistics related to the events of natural calamities in Singapore, but still bringing new policies might help Aviva to get more clients in their company’s portfolio.
- Recently, the government has reduced the interest rate. This is going to have adverse effect on people who opt for the long-term insurance and specially life insurance. Hence, it is recommended that Aviva and other life insurance company should approach to Singaporean government can ask to revive or find some ways through which the people do not become loser and decline from taking up insurance.
This report can be wrapped up by stating that there are several factors that amalgamate to form the workings entire demand and supply. However through this report it has been tried to focus on the influence of human behaviour and climatic changes on the demand for insurance. The report also tried to highlight the ways in which technological up-gradation and premium quoted helps in deciding the total supply of the insurance in the market. The economy is recovering from the shock of financial crises. However, if Aviva can follow the recommendations of diversifying their products, collaborating with government and reducing the premium rate it can expect to grab a large share of market in Singapore.
Aviva Singapore. (2016). Aviva Singapore. Retrieved February 7, 2017, from
Bakker, R. M., & Knoben, J. (2014). Built to last or meant to end: Intertemporal choice in strategic alliance portfolios. Organization Science, 26(1), 256-276.
Bernard, C., He, X., Yan, J. A., & Zhou, X. Y. (2015). Optimal Insurance Design Under Rank?Dependent Expected Utility. Mathematical Finance, 25(1), 154-186.
Botzen, W. W. (2013). Managing extreme climate change risks through insurance. Cambridge University Press.
Broke?ov?, Z., Pastor?kov?, E., & Ondru?ka, T. (2014). Determinants of Insurance Industry Development in Transition Economies: Empirical Analysis of Visegrad Group Data. The Geneva Papers on Risk and Insurance Issues and Practice, 39(3), 471-492.
Chang, T., Lee, C. C., & Chang, C. H. (2014). Does insurance activity promote economic growth? Further evidence based on bootstrap panel Granger causality test. The European Journal of Finance, 20(12), 1187-1210.
Clarke, D. J. (2016). A theory of rational demand for index insurance. American Economic Journal: Microeconomics, 8(1), 283-306.
De Janvry, A., Dequiedt, V., & Sadoulet, E. (2014). The demand for insurance against common shocks. Journal of Development Economics, 106, 227-238.
Ellis, R. P., Chen, T., & Luscombe, C. E. (2014). Comparisons of Health Insurance Systems in Developed Countries. Encyclopedia of Health Economics, 1-22.
Embrechts, P., & Hofert, M. (2014). Statistics and quantitative risk management for banking and insurance. Annual Review of Statistics and Its Application, 1, 493-514.
Gaganis, C., Hasan, I., & Pasiouras, F. (2013). Efficiency and stock returns: evidence from the insurance industry. Journal of Productivity Analysis, 40(3), 429-442.
Haseltine, W. A. (2013). Affordable excellence: the Singapore healthcare story. Brookings Institution Press.
Huat, T. C., & Kuen-Chor, K. (Eds.). (2014). Handbook of Singapore—Malaysian Corporate Finance. Butterworth-Heinemann.
Jaeger, C. C., Webler, T., Rosa, E. A., & Renn, O. (2013). Risk, uncertainty and rational action. Routledge.
Jinghua, L. (2015). Pension Reform in Singapore and Its Enlightenment of China. Southeast Asian and South Asian Studies, 2, 016.
Klumpes, P., Kumar, A., & Dubey, R. (2014). Investigating risk reporting practices in the global insurance industry. British Actuarial Journal, 19(03), 692-727.
Kunreuther, H. C., Pauly, M. V., & McMorrow, S. (2013). Insurance and behavioral economics: improving decisions in the most misunderstood industry. Cambridge University Press.
Le Lesle, M. V., Ohnsorge, F., Kim, M., & Seshadri, S. (2014). Why complementarity matters for stability—Hong Kong SAR and Singapore as Asian financial centers (No. 14-119). International Monetary Fund.
Lee, C. C., Lee, C. C., & Chiu, Y. B. (2013). The link between life insurance activities and economic growth: Some new evidence. Journal of International Money and Finance, 32, 405-427.
Liu, W., Zeng, X., & Yao, L. (2017). An Analysis of the Impact of Medical Insurance Policies on Treatment Selection Among Kidney Disease Patients via System Dynamics. In Proceedings of the Tenth International Conference on Management Science and Engineering Management (pp. 737-744). Springer Singapore.
M?hlnickel, J., & Wei?, G. N. (2015). Consolidation and systemic risk in the international insurance industry. Journal of Financial Stability, 18, 187-202.
Outreville, J. F. (2015). The relationship between relative risk aversion and the level of education: a survey and implications for the demand for life insurance. Journal of Economic Surveys, 29(1), 97-111.
Ramesh, M. (2016). Funds in Malaysia and Singapore. Transforming the Developmental Welfare State in East Asia, 191.
Traeger, C. P. (2014). Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity. Economic Theory, 56(3), 627-664
Venkat, P. & Watts, J. (2016). Singapore’s Air Quality Plummets as Haze Returns. WSJ. Retrieved February 7, 2017, from
Xian, X., Bo, D., & Zhide, F. (2015). Offshore Insurance in Singapore and Its Experiences for China. Asia-pacific Economic Review, 3, 013.
Zweifel, P. & Eisen, R. (2011). The Supply of Insurance.