(Why) Are We Underinsured?

SKBI Newsletter | November 2026

The protection gap may not simply reflect insufficient consumer demand or financial literacy. Insurance profitability depends on five key drivers—mortality, morbidity, persistency, investment returns and expenses. Looking across the functioning of these drivers, Akhil proposes a supply-side framework that asks how capital is allocated, how protection is sold and who ultimately bears the risk. 

Three Questions on the Supply Side of Protection:

• Who funds protection? Capital tends to flow toward activities where returns are faster and easier to capture. Reducing mortality and morbidity sits at the other end of that spectrum, with benefits that take longer to materialise and are shared with governments, hospitals, and wider society. How far that shapes where protection capital ends up is not well established.
• Who sells protection? Distribution economics shape how adviser effort is allocated. Singapore already regulates this area directly, including through the Balanced Scorecard framework. The open question is empirical: how much of the remaining protection gap is attributable to distribution economics once those safeguards are in place. Answering it requires adviser-level evidence.
• Who bears the risk? Reinsurance lets insurers transfer substantial risk, and reinsurers' appetite shapes what can be transferred and on what terms. Whether that appetite also shapes what insurers choose to offer is the part I would most want tested.

Overall, Akhil proposes a supply-side framework for examining the protection gap: how capital is allocated, how distribution economics work, and how risks are transferred may all shape the protection ultimately available to hoAuseholds.

The protection gap echoes long-standing puzzles in academic research, including the “annuity puzzle”—why households annuitize much less of their wealth than standard economic models predict. While academic research has offered various explanations, Akhil’s framework highlights several important questions that remain insufficiently understood. 

Key Takeaways from the Dialogue:

• The question of who funds protection points to a classic economic problem of externalities. If insurers bear the investment costs but cannot capture the full benefits, their incentives to make such investments will be weakened. The resulting tension between the private value captured by insurers and the social value they create has received limited direct attention in academic research.
• Akhil’s second observation echoes academic evidence that financial advisers tend to recommend products that offer them greater compensation. However, much of this evidence comes from markets with different distribution regulations. The link between these incentives and Singapore’s protection gap therefore remains an open empirical question.
• Existing academic studies show that reinsurance can create value for insurance companies, but can also introduce new risks (Koijen and Yogo, 2016; Kirti and Sarin, 2024). Akhil’s observation raises a further question: can the ability to transfer risk shape product design in the first place? More evidence is needed to understand this feedback effect.

Akhil’s framework both echoes existing academic evidence and points to important unanswered questions. In particular, more research, including research using adviser-level data, is needed to understand the social value of insurance companies and how interactions among their investment, insurance, distribution and reinsurance activities shape outcomes for policyholders and society.

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