Development of utility function for life insurance buyers in the Indian market

Author(s): G Dutta, S Basu and J John

Source: The Journal of the Operational Research Society , April 2010, Vol. 61, No. 4
(April 2010), pp. 585-593
Published by: Palgrave Macmillan Journals on behalf of the Operational Research
Society

Stable URL: https://www.jstor.org/stable/40608181

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Journal of the Operational Research Society (2010) 61, 585-593 © 2010 Operational Research Society Ltd. All rights reserved. 0160-5682/10 ^l··

www.palgrave-journals.com/jors/

Development of utility function for life insurance

buyers in the Indian market
G Dutta1*, S Basu2 and J John1
Indian Institute of Management, Ahmedabad, India; and 2 Indian Institute of Management, Bangalore, India

Insurance as a financial instrument has been used for a long time. The dramatic increase in competition
within the insurance sector (in terms of providers coupled with awareness for the need for insurance) has
concomitantly resulted in more policy options being available in the market. The insurance seller needs to know
the buyer's preference for an insurance product accurately. Based on such multi-criterion decision-making,
we use a logarithmic goal programming method to develop a linear utility model. The model is then used to
develop a ready reckoner for policies that will aid investors in comparing them across various attributes.
Journal of the Operational Research Society (2010) 61, 585-593. doi:10.1057/jors.2009.26
Published online 25 March 2009

Keywords: finance; mathematical programming; utility theory

1. Introduction
development of a utility function is very important in the
The liberalization of the Indian insurance sector has resulted Indian context. This paper is also possibly one of the first
in a number of insurance companies entering the market. attempts to develop a utility model of insurance products
using LGPM. We believe this work will help the buyer of an
This has led to a plethora of choices both in terms of service
providers as well as products to the consumers. With the insurance product to compare the existing products thereby
making a better-informed buying decision.
huge untapped market that still exists, the insurance market in
This paper is organized as follows. Section 2 discusses the
India is expected to increase rapidly. In this paper we attempt
overview of the insurance market in India and the increasing
to develop a ready reckoner to match the buyer's require-
importance it is garnering in that context. Section 3 outlines
ment with the products that the insurance companies are
a literature survey on the subject. In Section 4, we describe
offering. This will aid policyholders and potential investors
in comparing the various policies being offered. the proposed model. In Section 5, we describe the loga-
rithmic goal programming model. In Section 6, we outline the
In brief, we attempt to find
methodology followed to implement the model and arrive at
the results. In this section, we also show the results obtained
(a) the attributes of the product that a policyholder is looking
for, using a sample data set and then extend it to the larger case.
Section 7 talks about the findings from the models and expla-
(b) given these attributes, the relative weights of various
attributes, nation of the output. Finally, Section 8 concludes the paper
(c) a way to compare the existing insurance products based as well as outlines the possible extensions that could possibly
on the framework developed, and arise from the work discussed in this paper.

(d) probabilities of selecting a product from a set of mutually

exclusive alternatives.
2. Overview of the insurance market in India
Based on a Multi Criterion Decision-making Approach
The Indian insurance business (India Core, 2007) is currently
(MCDA) and a Logarithmic Goal Programming Method
of the order of US$10 billion (aproximately INR 450 billion)
(LGPM), we develop a linear utility model to answer the
and is experiencing an annual growth of about 15-20%. In
above questions. Although a lot of work has been done on
the Indian context, there are two important indicators:
the use of various mathematical techniques to develop utility
functions, not much work has been done towards devel-
1. Huge amounts of funds are available with the largest life
oping a utility model for insurance products. Hence, the
insurer in India, the Life Insurance Corporation (LIC)
of India Limited. It is interesting to note that even after
* Correspondence: G Dutta, Wing 3, PMQ Area, Room No 3H, Indian about 10 years of a decontrolled insurance sector, LIC still
Institute of Management, Ahmedabad 380015, Gujarat, India. controls over 90% of the life insurance business in India.

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586 Journal of the Operational Research Society Vol. 61, No. 4

2. The other important indicator is the amount of premium insurance in

collection for insurance policies. At present, this is about (2003) has a
2% of the GDP of India. insurance po
policy holde
Tables 1 and 2 provides a comparative analysis of per capita
The Analyt
insurance in US, UK, Japan and India. The comparison also
(1980) and
indicates the tremendous growth potential for insurance prod-
obtaining th
ucts in India.
and relative
With the advent of private players, there has been an
LGPM meth
increase in the number of new and innovative products.
(1999). Both
extensively
3. Literature survey
Another ap
There is a considerable volume of literature on various prod- is the use
ucts in insurance as well as the use of various optimization primarily a
techniques in insurance policies. In fact, optimization tech- sciences to
niques have in some way always formed the backbone of the multi-attrib
insurance policy selection by customers - it is like any port- erences in t
folio selection problem. In that sense, even the seminal work work on Co
of Markowitz (1952) on portfolio theory can be extended and researchers
applied to the insurance domain. However, not much work 1998), Gree
has been done, in particular, using LGPM in the life insur- et al (1983).
ance industry. But some parallels can be drawn from similar Green and
(not identical) work that has been done in the banking sphere, based on a d
especially in the Asset Liability Management sphere (Bessis, dents react
2002). of the market researcher to find the worth of a set of indi-

In terms of the insurance domain, Basu et al (2004) vidual attributes, given some type of compositional rule, that
discuss the use of different operational research and manage- are more consistent with the respondents' overall preference.
ment science models in various insurance applications. Das On the contrary, the LGPM is a compositional and build-
and Basu (2003) also have used an optimization techniqueup approach in which total utility for some multi-attribute
to obtain the optimal premium in the case of automobile product (or service in this case) is found to be a weighted
sum of the products (or services) perceived and associated
Table 1 Comparison of per capita insurance value ratings. Moreover, it is important to point out that a key
distinction between these approaches lies in the predominant
Country Life premium per capita US $ in 2005
purpose for which it is used. Conjoint Analysis generally
Japan 2956.3 emphasizes predictive validity and regards explanation as
UK 3287.1
the desirable (but secondary) objective, whereas the LGPM
USA 1753.2
that we are discussing in this paper is true for an expectancy
India 10
value theorist.

Table 2 Basis for comparative importance

Comparative Definition Explanation

importance

1 Equally important Two decision elements (eg, indicators) equally influence the parent
decision element

3 Moderately more important One decision element is moderately more influential than the other
5 Strongly more important One decision element has a stronger influence than the other
7 Very strongly more important One decision element has significantly more influence over the
other
9 Extremely more important The difference between influences of the two decision elements is
extremely significant
2, 4, 6, 8 Intermediate judgment values Judgment values between equally, moderately, strongly, very
strongly, and extremely
Reciprocals If ν is the judgment value when i is compared to j, then 1/v is
the judgment value when j is compared to i

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 G Dutta et a/ - Development of utility function for life insurance buyers 587

In this paper, we use the ΑΗΡ- and LGPM-based method- d. We examine for consistency because during the pair-
ology over the Conjoint Analysis methodology. The reasons wise comparison, discrepancies might occur between
for the use of the ΑΗΡ- and LGPM-based methodology are the results of the comparison and the decision. In ΑΗΡ,
due to the fact that no such usage has been seen in the context before computing the weights based on pairwise judg-
of insurance products and that this method also allows for an ments, the degree of inconsistency is measured by the
alternate approach to be used for obtaining customer prefer- Inconsistency Index (II). Perfect consistency implies a
ences and then using them for further analysis. value of zero for II. However, perfect consistency cannot
be demanded because, as human beings, we are often
4. The model biased and inconsistent in our subjective judgments.
Therefore, it is considered acceptable if II ^0.1. For II
In order to enable a customer to choose the right insurance values greater than 0.1, the pairwise judgments may be
plan/policy, we decided to use the linear utility value concept.
revised before the weights are computed.
The utility function U (X) is defined as follows:
Now we try to implement the LGPM methodology developed
U{X) = Yjwixi (1) by Bryson and Joseph (1999) to ascertain the weights of the
i
criteria in the final model. We start with a set of criteria that

where, we think are critical in the decision-making of a customer.

We attempt to find the weights (tu,·) that different decision-
jcj = level of parameters/criteria / important for policy selection
makers ascribe to the different criteria through a survey.
w' = the relative importance (weights) assigned to the ith criteria.

In this paper, we describe a method of finding the weights (w[) 5. Logarithmic goal programming model
by LGPM. The methodology followed includes the LGPM
In goal programming we minimize underachievement and
method developed by Bryson and Joseph (1999) and ΑΗΡ
overachievement from the required goal. In conventional goal
methodology developed by Saaty (1980) and Aczel and Saaty
programming we have these variables (underachievement and
(1983).
overachievement) in linear forms. In LGPM, we take the
We first follow the steps detailed in the ΑΗΡ
product of underachievement and overachievement and take
methodology - the steps are as follows:
their logarithms. The basic idea as suggested by Bryson and
Joseph ( 1 999) is that minimizing a function with two variables
1 . Establish the hierarchical structure by interviewing experts,
(linear in the objective function and summed over indices) is
conducting surveys and analyzing the elements that might
similar to minimizing logarithms of the product of the vari-
affect the survey results. The elements of similar impor-
ables (product computed over the same indices).
tance are collected on the same level in this step.
We first define the sets, indices and parameters of the model
2. The calculation of the weight of different attributes is
obtained through the following four steps: / = set of first criterion I = (1,2,3, i ... I max) indexed
by i
a. The attributes comparison is conducted in this step inJa = set of second criterion J = (1,2,3 ... j ... J max)
pairwise manner. The scale used in this comparison is indexed by j
shown in Table 2.
L = Link or pair of criteria (/, j) where / e I and j e J
b. The priority vector is calculated by dividing each ίφί
comparison value by the sum of the values in corre-Τ = set of decision-makers indexed by t, Τ =
sponding fields for the aggregation of the rows; namely, (1,2, . ..*... Γ max)
the sum of the proportion each comparison value
a'- = the ratio of the response to the /th attribute with
occupies in its corresponding row. respect to the response for the 7 th attribute for the
tth respondent, where t e Τ and (/, j) e L
2_^cell'alueilcolumnsumi (2) pt.j = the value generated by the methodology used in this
/
work for a given respondent t for the pair (/, j)
Equation (2) shows the sum of the percentage each where t € Τ and (i, j) e L. The computation of the
comparison value occupies in its corresponding row. value of p'- is explained in Equation (3) given later.
An η χ 1 matrix is acquired in this step. qjj = a value generated by the methodology used in this
c. The maximum eigenvalue is computed by multiplying work for a given respondent / for the pair (/, j)
the entire matrix with the acquired priority vector to where t e Τ and (/, j) e L
produce a n χ 1 matrix and then dividing this matrix by Vj = is the decision variable of the LGPM (not
the priority vector to acquire unit vectors. The average normalized)
of the unit vectors is sequentially calculated to acquire Wj = normalized decision variable or the weights of
the maximum eigenvalue. different attributes

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588 Journal of the Operational Research Society Vol. 61, No. 4

LGPM involves a linear goal programming model in which The optimal solut
the objective is to generate a group mean priority point vector normalized vector
w = (w', W2, . . . , wn) such that for the comparison between normalized to giv
each pair of criteria '/' and 'y', the difference between the vector w = (w', w
ratio (wi/wj) and the decision-makers specified a'- is mini- each (i, j).
mized. Please note that data value of / max defined in this Properties of the
model is N.
(a) This logarithm
Let there be real numbers p'- > 1, q'- > 1 such that infeasible.

(b) LGPM is mathematically similar to the minimum sum of

(wi/wj)x(ptij/qtij)=atij, (3) absolute errors regression model, which is known to be
resistant to the presence of outliers.
(c) Hence, the presence of outliers in the pairwise compar-
where ρ '· and q'- both cannot be greater than 1 . It should be
ison preference data should not have any adverse effect.
noted that if the computed value of p'- < 1, then, we replace
(d) Given that ln(ö) is the objective function, θ is the
the computed value by 1, else we retain the computed value
minimum average value that each entry in the compar-
oip'u. ison matrix would have to be multiplied by in order to
Then, p'- = q'- = 1 implies that (wí/wj) = a'-,
make the set of pairwise comparison values consistent.
Thus if the decision-makers' estimates were consistent
q'- > 1 implies that (wí/wj) > a'-, and p'- > 1 implies that
we would have ln(0) = 0 or θ = 1. Otherwise ln(#) > 0
(Wi/Wj)<alj. or0>l.

Therefore, if p'- = q'- = 1 for each pair of criteria Τ and 'y ', Dominance Dominance occurs when one option pe
then the set of point estimates provided by the decision-maker least as well as another on all criteria and strictly be
7' is consistent; otherwise the data are inconsistent and our the other on at least one criterion. In principle, o
problem then is to minimize the product Πϊε/Π/ε//7!/^//· might dominate all others, but in practice this i
Aczel and Saaty (1983) suggested that the group Once the decision-maker has ranked the different insurance
'consensus' pairwise comparison values should be the products on the basis of the criteria, an initial step can be to
geometric mean of the individual pairwise comparisonsee if any of the options dominate others.
values. Rather than focusing on each pairwise comparison,
we will focus on the entire set of pairwise comparison values. Linear additive model According to a study by Cochrane
Therefore, if Τ is the index set of the decision-makers and and Zeleny (1973), if dominance is not observed, and it can
M = | Γ |, then it follows that for the group, our problem iseither be proved, or reasonably assumed, that the criteria are
to minimize the product for all respondents t e Τ and each preferentially independent of each other and if uncertainty is
value of (/, j) e L. Thus the problem is to minimize the termnot formally built into the MCDA model the simple linear
additive evaluation model is applicable. The linear model
Y[teTi'ielY'je(iJ)eLPijaij·
This translates to solving the following linear goal shows how an option's values on the many criteria can be
programming problem where the decision variables are the combined into one overall value. This is done by multi-
un-normalized vector (v', i>2, · · · , vn) · In this case, insteadplying the value score on each criterion by the weight of that
of minimizing the product, we minimize the logarithm of thecriterion (determined by LGPM), and then adding all those
product and use it in a linear programming problem. weighted scores together. In case there are two parameters,
which are not preference-independent, then one approach can
be to club together the two variables and treat them as one
variable. Otherwise a more complicated MCDA-based model
Minimize Ζ = ln(0) = ( - j J^ 1η(Θ' ) (4)that calculates correlation among the parameters can be used,
but we will not go into that.
subject to Into) - 1η(υ7) + ln(^) - Ιη(^) = ln(^)
VteT;(iJ)eL (5)
6. Methodology
In this section, we describe the data collection method
^ ' iel jeJ
employed in this study and the modelling details. Further,
in Section 6.2, we describe the exact workings of the model
V t e T (6) using a smaller data set and a reduced set of factors. This, we
hope, will significantly enhance the readability of the paper.
where Κ = Ν χ (Ν
Finally, -
Section 6.3 talks 1); / =implemen-
about the mathematical {1, 2
are tation of the full scale model described in this paper.
non-negative.

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 G Dutta et al· - Development of utility function for life insurance buyers 589

6.1. Data collection is less than 1 min. The other advantages of using AMPL are
as follows:
We collected information on the life insurance policies and
conducted a survey to determine the relative importance given
(a) The model in the computer code can be written in the
to these factors. We first demonstrate the computational part
same way as the formulation is written.
by having a sample data set which we solve in the Excel
(b) Model data independence.
solver (this is explained in Appendix A). This sample data has
(c) Model solver independence.
10 respondents and eight attributes. In this sample study, we
(d) There is no restriction on the number of variables.
found that there is no added advantage to having a scale of
1-100 and hence, we reduced the choice set to 1-9. The ques-
We grouped the data suitably to identify if respondents in
tionnaire is provided in Appendix B. For the life insurance
different salaried classes had allotted different weights.
study, we had 102 respondents. However, some responses
were inaccurate or had missing data points; excluding these,
we were left with 87 respondents. It should be noted7.that
Model findings
the proposed method of generating priority point vectors in
We evaluated the existing life insurance policies using the
the literature suggests that each respondent should specify
weights. Specifically, we looked at money-back life insurance
values for each pairwise comparison. Since we had a large
number of factors for each category of policy, we decided to (where maturity benefits are paid in installments at
policies
fixed intervals).
reduce the number of values input to 1 for each factor. We
then derived the pairwise comparison values. The surveyKey
wasparameters for life insurance policies
conducted among predominantly salaried or self-employed
persons.
1. Low premium
In the second part of the survey, we requested the respon-
2. Flexibility in payment structure

dents to rate the existing products available in the market. Tax benefits in insurance plan
3.
4. Benefits on death
Each respondent was told to rate each product on each
5. Benefits on survival
attribute.
6. Good customer service

6.2. Model explanation with a sample data set Online payment

Renegotiation of term/insured amount
In this section, we describe the computational aspects of the
7. Bonus
model used in this paper on a sample data set that can be easily
8. Add-ons, Special Schemes
solved in the Excel solver. The information collected was the
Loan against policy
same as in the case of the implementation of the full model;
Group schemes
that is, we collected information on the life insurance policies
9. Availability of riders enabling customization of insuranc
and conducted a survey to determine the relative importance
plan
given to these factors. This sample data had 10 respondents
Accident and disability benefit
and eight attributes. In this sample study, we found that thereCritical illness benefit
is no added advantage to having a scale of 1-100 and hence,
we reduced the choice set to 1-9 in the detailed study. The
The LGPM model yielded the following weights provided in
explanation of the computational part and the results obtained
Table 3. Although we found the equations for different income
using this sample data set which was solved using the Excel
classes, we found that the variations of the values of weights
solver is provided in Appendix A. were not more than 2%.
Based on this, we find that the income tax benefit is the
6.3. Implementation of the mathematical model
most important criterion for insurance. The benefit on death is
We applied the LGPM to a linear model with nine attributes.the second important criterion for an insurance buyer. Again,
The decision variables were the weights of different variables.
looking at the coefficients, we can also say that add-on, special
We obtained the weights of nine attributes from LGPM using schemes are the least important criterion. The life insurance
our data set of 87 respondents. The number of variables study
for data were also categorized by salary class and studied.
the mathematical programming model is over 7200. AlthoughHowever, the weights were found to be largely similar, and
a small data set can be implemented in the popular solverwithin
in ±0.02 of the values shown above. However, there was
Excel (as has been demonstrated in the example highlighted significant
in difference in the consistency indicators for each
Appendix B), it is difficult to implement a large mathematical
class of salary, as shown in Table 4. Therefore, it is appropriate
programming problem in Excel Solver. Therefore we choose
to use the aggregate figure and not specific weights for each
the A Mathematical Programming Language (AMPL) devel- salary class.
oped by Fourer et al (1993) and CPLEX solver (Version 8.0)We note that certain salary classes (extremes) had very
for implementing the LGPM. The solution time for this model
few respondents. Therefore, the validity of results for such

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590 Journal of the Operational Research Society Vol. 61, No. 4

Table 3 Weights assigned from the model Table 5 Description and abbreviation of the parameter

Attribute name (indexed by i) Weight (ai ) Abbreviation Description of the Parameter

Low premium 0.1141 LP Low premium

Flexibility in payment structure 0.1059 FPS Flexibility in payment structure
Tax benefits in insurance plan 0.1362 TB Tax benefits
Benefits on death 0.1319 BoD Benefits on death
Benefits on survival 0.1211 BoS Benefits on survival
Good customer service 0.1014 GCS Good customer service
• Online payment Online payment
• Renegotiation of term/insured amountRenegotiation of term/insu
Bonus 0.0978 BN Bonus
Add-ons, special schemes 0.0856 SS Add-ons, Special schemes
• Loan against policy Loan against policy
• Group schemes Group schemes
Availability of riders enabling 0.1059 RID Availability of riders enabling
customization of insurance plan customization of insurance plan
• Accident and disability benefit Accident and disability benefit
• Critical illness benefit Critical illness benefit
• Major surgical assistance Major surgical assistance

Table 4 Respondent's profile and consistency indicators Since different attributes have different weights, an insur-
ance provider will concentrate on those factors where the
Salary per month Number of Consistency
responses indicator weights are higher. So an insurance provider will be interested
in improving on BOD than SS.
Less than Rs. 10,000 8 0.5578
Assuming that there are only these six insurance products
Rs.l0,000-Rs.20,000 30 0.7690
Rs.20,000-Rs.30,000 30 0.7460 in the market, in Table 7, we calculate the utility score of
Rs.30,000-Rs.40,000 8 0.7795 each insurance product as assigned by the buyer. We then use
Rs.40,000-Rs.50,000 7 0.4962 a multinomial logit model (Luce, 1959; Luce and Suppes,
More than Rs. 10,000 4 0.7350 1965; McFadden, 1980). The multinomial logit model then
Aggregate 87 calculates the probability that a customer will buy one of the
products.

8. Conclusion and extensions

classes is suspect. However, one may infer that these extre
categories have different weights. Therefore,
We have investigated a more
the weights corresponding targe
to the param-
survey may be required to determine
eters weights
used for selecting life applicable
insurance policies and vehicle
the extreme salary classes.insurance policies. Combining these weights with a linear
utility function, we have been able to develop a framework
Evaluation of life insurance policies: From the above st
that can compare and rank the life insurance policies currently
(Tables 3 and 5) we find that the utility of the insuran
available.
product can be expressed as
We believe that our work makes it possible to identify
U(P) =0.1141 LP +0.1059 FPS +0.1362 TB the (relative) key parameters and design insurance policies
+ 0.1319 BOD +0.1211 BCS +0.1014 GCS accordingly. Further surveys on life insurance will allow
+ 0.0978 BN + 0.0856 SS + 0. 1059 RID (6) weights to be determined for segments of the population.
These segments may be based on salary class, or nature of
The existing six products have been compared on all theemployment.
nine Once these weights are defined, and the utility
function
attributes and their rating is given in Table 6. We also show is drawn up, insurance companies can even tailor
their products according to the relative importance of specific
the utility of the existing products. This will help both-the
consumer and the insurance providers. features of the policy.
This will also help the buyer in deciding the premium This work can be extended in three directions. The first
for
a product; particularly, since the buyer is interested in finding of this work will be sector specific. We note that
extension
how much premium he/she should pay for this product. this work has been carried out in the life insurance sector in
From
this study it is possible to conclude that the buyer would A
India. besimilar extension can be done in vehicle insurance
willing to pay a higher premium for product PI (whoseor in the health insurance sector. Although the same linear
utility
additive
value is 4.07) as compared to product P2 (whose utility value model may be applicable, the number of attributes
is 2.74). and the weights of each attribute may be different.

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 G Dutta et ai - Development of utility function for life insurance buyers 591

Table 6 Comparisons of existing products

Name LP FPS TB BOD BOS GCS BN SS RID SCORE

Weights^ 0.1141 0.01059 0.1362 0.1319 0.1211 0.1014 0.0978 0.0856 0.1059
PI 453445345 4.07
P6 343444454 3.83
P3 343334353 3.37
P5 343433432 3.22
P4 534232343 3.21
P2 333224332 2.74

Table 7 Results
Cochrane JL and Zeleny M (1973). Multiple Criteria Decision Making.
University of South Carolina Press: USA.
Product SCORE(Ui) EXP(Ui) Prob(Pi)
Das S (2003). Joint life insurance policies with differential benefits
name
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PI 4.07 58.556962 0.294268 Institute of Management, Bangalore.
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P3 3.37 29.078527 0.146129 system. / Ins Risk Mngt 2/3: 61-72.
P5 3.22 25.028120 0.125774 Fourer R, Gay DM and Kernighan BW (1993). AMPL (A Modeling
P4 3.21 24.779086 0.124523 Language for Mathematical Programming), The Scientific Press
P2 2.74 15.486900 0.077827 Series. Boyd & Fraser Publishing Company: California, USA.
Green PE and Srinivasan V (1978). Conjoint analysis in consumer
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The second extension is based on the assumption of HM
Markowitz (1952). Portfolio selection. J Financ 7: 77-91.
linearity. We have assumed the utility function to be linear. D (1980). Econometric models for probabilistic choice
McFadden
This may be a good approximation for the development amongof the products. J Bus 53(3 Part 2): S13-S29.
Saaty TL (1980). The Analytic Hierarchical Process. McGraw Hill
utility function. However, in reality, the utility function may
Book Company: New York.
be non-linear. In such cases, it may be possible to find the
Srinivasan V (1980). Comments on 'On conjoint analysis and quantal
second and higher order terms for each attribute in the choice
model. models'. J Bus 53(3 Part 2): S45-S46.
The real challenge of this problem will be to collect data V (1998). A strict paired comparison linear programming
Srinivasan
approach to nonmetric conjoint analysis. In: Aronson JE and Zionts
through market surveys for computing the higher order terms.
S (eds). Operations Research: Methods, Models and Applications.
Although we have shown that LGPM is a method to develop
Quorum Books: Westport, CO, USA, pp 97-112.
a linear utility function for the insurance method, it does
Srinivasan V, Jain AK and Malhotra NK (1983). Improving predictive
not show how this method compares with that of Conjoint power of conjoint analysis by constrained parameter estimation.
Analysis. A comparative study will be an interesting extension
J Mark Res 20: 433-438.

of this paper which we plan to take up in future.

Appendix A.

References Model explanation with a sample data set

In this part we explain the method using a small sample. We

Aczel J and Saaty Τ (1983). Procedures for synthesizing ratio
judgments. J Math Psychol 27: 93-102. assume that there are eight factors and the maximum rating a
Basu S, Dutta G, Gupta R and Bhatnagar A (2004). Usage ofrespondent can assign, say, is 100, and the minimum, say, is 1.
mathematical models and operation research techniques in the Table A. 1 shows the sample data set. The first responder's
insurance industry. J Ins Risk Mngt 3(5): 77-96. score for the factors are 85, 90, 100, 100, 95, 100, 70 and
Bessis J (2002). Risk Management in Banking. John Wiley & Sons
Ltd: UK. 75, respectively. Hence the values of responder 1 (t = 1) for
attribute 1 and 2 (or / = 1 and j = 2) are a'2 = 85/90 = 0.944.
Bryson Ν and Joseph A (1999). Generating consensus priority point
Similarly, we can find that for responder 8, <z|3 = 80/60 =
vectors: A logarithmic goal programming approach. Comput Opns
Res 26: 637-643. 1.333.

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592 Journal of the Operational Research Society Vol. 61, No. 4

Table A.I Sample data set

Respondent Factor 1 Factor 2 Factor 3 Factor 4 Factor 5 Factor 6 Factor 1 Factor 8
Rl 85 90 100 100 95 100 70 75
R2 90 80 80 95 75 100 70 83
R3 100 50 90 100 100 90 50 63
R4 80 90 99 75 99 95 95 70
R5 95 90 95 98 92 80 82 75
R6 100 100 60 50 80 90 90 100
R7 100 90 80 90 80 60 80 100
R8 80 80 60 60 80 100 80 60
R9 80 90 60 70 90 50 70 60
RIO 100 80 100 100 70 80 80 60

Table A.2 Part computation

Respondent a'2 al3 a'4 a'5 a'6 all «18

Rl 0.944 0.850 0.850 0.895 0.850 1.214 1.133
R2 1.125 1.125 0.947 1.200 0.900 1.286 1.084
R3 2.000 1.111 1.000 1.000 1.111 2.000 1.587
R4 0.889 0.808 1.067 0.808 0.842 0.842 1.143
R5 1.056 1.000 0.969 1.033 1.188 1.159 1.267
R6 1.000 1.667 2.000 1.250 1.111 1.111 1.000
R7 1.111 1.250 1.111 1.250 1.667 1.250 1.000
R8 1.000 1.333 1.333 1.000 0.800 1.000 1.333
R9 0.889 1.333 1.143 0.889 1.600 1.143 1.333
RIO 1.250 1.000 1.000 1.429 1.250 1.250 1.667

Table A.3 Part computation of the aj·

Respondent all al3 alA α15 α16 «17 al%

Rl 0.894 0.805 0.815 0.847 0.774 1.048 0.895
R2 1.065 1.065 0.909 1.137 0.819 1.110 0.856
R3 1.894 1.052 0.959 0.947 1.011 1.726 1.253
R4 0.842 0.765 1.023 0.765 0.766 0.727 0.902
R5 1.000 0.947 0.930 0.978 1.081 1.000 1.000
R6 0.947 1.578 1.918 1.184 1.011 0.959 0.789
R7 1.052 1.184 1.066 1.184 1.517 1.079 0.789
R8 0.947 1.263 1.279 0.947 0.728 0.863 1.053
R9 0.842 1.263 1.096 0.842 1.456 0.986 1.053
RIO 1.184 0.947 0.959 1.353 1.138 1.079 1.316

Table A.4 Part computation of the p'

Rl 1.000 1.000 1.000 1.000 1.000 1.048 1.000

R2 1.065 1.065 1.000 1.137 1.000 1.110 1.000
R3 1.894 1.052 1.000 1.000 1.011 1.726 1.253
R4 1.000 1.000 1.023 1.000 1.000 1.000 1.000
R5 1.000 1.000 1.000 1.000 1.081 1.000 1.000
R6 1.000 1.578 1.918 1.184 1.011 1.000 1.000
R7 1.052 1.184 1.066 1.184 1.517 1.079 1.000
R8 1.000 1.263 1.279 1.000 1.000 1.000 1.053
R9 1.000 1.263 1.096 1.000 1.456 1.000 1.053
RIO 1.184 1.000 1.000 1.353 1.138 1.079 1.316

Based on the above In the

mentioned next table,
method, we we show
comput
matrix. We show
in Table A.2. part the
of fact
the matrix
Then we again implement equations 3 and 5 by m
the transformation and putting it up in the matrix
if (Vi/vj) χ a'j > 1, then
We take the optimal values of w' and Vi from
solver, and after putting those values, we compute th
of a'- χ (Vi/vj) matrix We show
(Table p' ■
A.3). matrix in Tab

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 G Diitta et al· - Development of utility function for life insurance buyers 593

Table A.5 Optimal solution that has been used in the computation
12 3 4 5 6 7 8

0.135814 0.12863 0.12863 0.130273 0.12863 0.1236 0.117213 0.10721

We do similar transformation from q'- matrix and then we ca

and the constraints.

We now show the optimal solution of the model with the normalized values in Table A.5.

Appendix B.

Life insurance study questionnaire

Dear Sir/Madam

We are doing a study on Utility Function of Life Insurance Buyers in the Indian Institute of Management, Ahmedabad (IIMA
We would like to know the factors you would consider when choosing a life insurance policy. Filling this questionnaire shou
not take you more than 3 minutes.

Thank you

Your Name:

Your Date of Birth:

Your Occupation (tick one): Y

D Student D < 10000
D Executive D 10000-20000
D Self employed D 20000-30000
D 30000-40000
D 40000-50000
D 50000 and above

Following are some factors people consider while buying an insurance policy. Indicate the importance of each facto
influencing your decision to buy a particular life insurance policy. Indicate the importance on a scale of 1 (not at all imp
to 9 (very highly important).

Serial no Attribute name Relative importance (1-9)

1 Low premium
2 Flexibility in payment structure
3 Tax benefits in insurance plan
4 Benefits on death
5 Benefits on survival
6 Good customer service

• Online payment
• Renegotiation of term/insured amount
7 Bonus

8 Add-ons, Special schemes

• Loan against policy
• Group schemes
9 Availability of riders enabling customization of insurance plan
• Accident and disability benefit
• Critical illness benefit

• Major surgical assistance

Received April 2005;

accepted December 2008 after three revisions

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