In this section, we explore some of the pioneering empirical exercises on determinants of life insurance. Most of these studies had focused on both the demand side factors and the supply side factors.
Headen and Lee (1974) studied the effects of shortrun financial market behaviour and consumer expectations on purchase of ordinary life insurance and developed structural determinants of life insurance demand.
They considered three different sets of variables: first, variables stimulating demand as a result of insurer efforts (e.g. industry advertising expenditure, size of the sales force, new products and policies, etc.); second, variables affecting household saving decision (e.g. disposable, permanent and transitory income, expenditure expectation, number of births, marriages, etc.) and lastly, variables determining ability to pay and size of potential markets (e.g. net savings by households, financial assets, and consumer expectation regarding future economic condition). They concluded that life insurance demand is inelastic and positively affected by change in consumer sentiments; interest rates playing a role in the shortrun as well as in the longrun.
Using an international dataset (12 countries over a period of 12 years) to examine the relationship between property liability insurance premiums and income, Beenstock et al. (1988) found out that marginal propensity to insure i.e., increase in insurance spending when income rises by 1$, differs from country to country and premiums vary directly with real rates of interest. Assuming a two period simple model; they considered the case when wealth W is reduced by G following a loss and no insurance purchased in the first period.
If there had been some insurance purchased than wealth in the first period equals (W- premium paid) and assuming loss, end period wealth is (G – sum insured). Thus, again the decision of consumer and his/her initial wealth status too are significant factors when shortrun or longrun consumption of insurance is considered.
The study by Truett et al. (1990) discussed the growth pattern of life insurance consumption in Mexico and United States in a comparative framework, during the period 1964 to 1984. They assumed that at an abstract level demand depends upon the price of insurance, income level of individual, availability of substitute and other individual and environment specific characteristics.
Further, they experimented with demographic variables like age of individual insured(s) and population within the age group 25 to 64 and also considered education level to have some bearing on insurance consumption decision. They concluded the existence of higher income inelasticity of demand for life insurance in Mexico with low income levels. Age, education and income were significant factors affecting demand for life insurance in both countries.
Starting with a brief review of Lewis’s theoretical study and an assumption that inhabitants of a country are homogeneous relative to those of other countries, the study by Browne et al. (1993) expanded the discussion on life insurance demand by adding newer variables namely, average life expectancy and enrollment ratio of third level education.
The study based on 45 countries for two separate time periods (1980 and 1987) concluded that income and social security expenditures are significant determinants of insurance demand, however, inflation has a negative correlation. Dependency ratio, education and life expectancy were not significant but incorporation of religion , a dummy variable, indicates that Muslim countries have negative affinity towards life insurance.
Based on a cross-sectional analysis of 45 developing countries, Outreville (1994) analysed the demand for life insurance for the period 1986. In his study he considered variables such as agricultural status of the country represented by the percentage of agricultural labour force; health status of the country in terms of amenities like percentage of population with access to safe drinking water; percentage of labour force with higher education and the level of financial development as factors explaining insurance demand other than the variables we have discussed above.
Two dummy variables were used to reflect the extent of competition in the domestic market and foreign participation in the countries considered.
The analysis shows that personal disposable income and level of financial development significantly relates to insurance development. Since the political philosophy regarding market openness varies from country to country, market structures dummy appeared to be significant.
Taking into account the expansion of the service sector during the early nineties and growth of insurance services in particular, Browne et al. (2000), tried to explain the differences in property liability insurance consumption across countries.
They considered individual’s income and wealth, degree of risk aversion, loss probability and price of insurance as variables affecting property-liability insurance demand, similar to those used for life insurance demand analysis.
The analysis was focused on the OECD countries and concluded that in general, insurance purchase is influenced by various economic and demographic conditions. Another study based on nine OECD countries examined the short run and long run relationship exhibited between economic growth and growth in the insurance industry.
This study by Ward et al. (2000) is a co-integration analysis using annual data for real GDP and total real premiums for the period 1961 to 1996. Results give an indication that country specific factors influence the causal relationship between economic growth and insurance market development.
Allowing income elasticity to vary as GDP grows for an economy, Enz (2000) proposed the S-curve relation between per-capita income and insurance penetration. Using this one factor model one can generate longrun forecast for life insurance demand. Observing the outlier countries or countries distant from the S-curve plot, it is possible to identify structural factors like insurance environment, taxation structures, etc. resulting in such deviations.
There are two detailed studies on the determinants of life insurance demand, one taking into consideration only the Asian countries and the other based on 68 economies.
The former study by Ward et al. (2003) and the later by Beck et al. (2003) evolves around the issue of finding the cause behind variations in life insurance consumption across countries. After almost three decades of empirical work in this direction, it is still hard to explain the anomalous behaviour of Asian countries with higher savings rate, large and growing population, relatively low provision for pensions or other security and a sound capital market but comparatively low per-capita consumption of insurance. Except Japan, most of the Asian countries have low density and penetration figures.
The two main services provided by life insurance: income replacement for premature death and long-term savings instruments, are the starting point for Beck et al. (2003). They considered three demographic variables (young dependency ratio, old dependency ratio and life expectancy), higher levels of education and greater urbanization as independent factors in explaining insurance demand.
Economic variables like Gini index and Human development index are new additions along with institutional variables reflecting political stability, access to legal benefits and an index of institutional development were used.
The analysis considering the time period 1961 to 2000 shows that countries’ with developed banking system, high income and lower inflation have higher life insurance consumption.
The association of insurance demand with demographic is not statistically strong however older the population, higher tends to be insurance consumption. The luxury good nature of insurance did not reflect through its association with income distribution.
In contrast to Beck et al. (2003) results, the study by Ward et al (2003) is indicative of the fact that improved civil rights and political stability leads to an increase in the consumption of life insurance in the Asian region as well in the OECD region.
Following Laporta et al (1997, 1998, and 2000) works relating to supportive aspect of legal environment for finance, they too considered the same in determining insurance demand. Analyzing the data from 1987 through 1998 for OECD and Asian countries, they observed that income elasticity between developed economies and emerging economies are consistent with “S-cure” insurance growth findings by Enz (2000).
Headen and Lee (1974) studied the effects of shortrun financial market behaviour and consumer expectations on purchase of ordinary life insurance and developed structural determinants of life insurance demand.
They considered three different sets of variables: first, variables stimulating demand as a result of insurer efforts (e.g. industry advertising expenditure, size of the sales force, new products and policies, etc.); second, variables affecting household saving decision (e.g. disposable, permanent and transitory income, expenditure expectation, number of births, marriages, etc.) and lastly, variables determining ability to pay and size of potential markets (e.g. net savings by households, financial assets, and consumer expectation regarding future economic condition). They concluded that life insurance demand is inelastic and positively affected by change in consumer sentiments; interest rates playing a role in the shortrun as well as in the longrun.
Using an international dataset (12 countries over a period of 12 years) to examine the relationship between property liability insurance premiums and income, Beenstock et al. (1988) found out that marginal propensity to insure i.e., increase in insurance spending when income rises by 1$, differs from country to country and premiums vary directly with real rates of interest. Assuming a two period simple model; they considered the case when wealth W is reduced by G following a loss and no insurance purchased in the first period.
If there had been some insurance purchased than wealth in the first period equals (W- premium paid) and assuming loss, end period wealth is (G – sum insured). Thus, again the decision of consumer and his/her initial wealth status too are significant factors when shortrun or longrun consumption of insurance is considered.
The study by Truett et al. (1990) discussed the growth pattern of life insurance consumption in Mexico and United States in a comparative framework, during the period 1964 to 1984. They assumed that at an abstract level demand depends upon the price of insurance, income level of individual, availability of substitute and other individual and environment specific characteristics.
Further, they experimented with demographic variables like age of individual insured(s) and population within the age group 25 to 64 and also considered education level to have some bearing on insurance consumption decision. They concluded the existence of higher income inelasticity of demand for life insurance in Mexico with low income levels. Age, education and income were significant factors affecting demand for life insurance in both countries.
Starting with a brief review of Lewis’s theoretical study and an assumption that inhabitants of a country are homogeneous relative to those of other countries, the study by Browne et al. (1993) expanded the discussion on life insurance demand by adding newer variables namely, average life expectancy and enrollment ratio of third level education.
The study based on 45 countries for two separate time periods (1980 and 1987) concluded that income and social security expenditures are significant determinants of insurance demand, however, inflation has a negative correlation. Dependency ratio, education and life expectancy were not significant but incorporation of religion , a dummy variable, indicates that Muslim countries have negative affinity towards life insurance.
Based on a cross-sectional analysis of 45 developing countries, Outreville (1994) analysed the demand for life insurance for the period 1986. In his study he considered variables such as agricultural status of the country represented by the percentage of agricultural labour force; health status of the country in terms of amenities like percentage of population with access to safe drinking water; percentage of labour force with higher education and the level of financial development as factors explaining insurance demand other than the variables we have discussed above.
Two dummy variables were used to reflect the extent of competition in the domestic market and foreign participation in the countries considered.
The analysis shows that personal disposable income and level of financial development significantly relates to insurance development. Since the political philosophy regarding market openness varies from country to country, market structures dummy appeared to be significant.
Taking into account the expansion of the service sector during the early nineties and growth of insurance services in particular, Browne et al. (2000), tried to explain the differences in property liability insurance consumption across countries.
They considered individual’s income and wealth, degree of risk aversion, loss probability and price of insurance as variables affecting property-liability insurance demand, similar to those used for life insurance demand analysis.
The analysis was focused on the OECD countries and concluded that in general, insurance purchase is influenced by various economic and demographic conditions. Another study based on nine OECD countries examined the short run and long run relationship exhibited between economic growth and growth in the insurance industry.
This study by Ward et al. (2000) is a co-integration analysis using annual data for real GDP and total real premiums for the period 1961 to 1996. Results give an indication that country specific factors influence the causal relationship between economic growth and insurance market development.
Allowing income elasticity to vary as GDP grows for an economy, Enz (2000) proposed the S-curve relation between per-capita income and insurance penetration. Using this one factor model one can generate longrun forecast for life insurance demand. Observing the outlier countries or countries distant from the S-curve plot, it is possible to identify structural factors like insurance environment, taxation structures, etc. resulting in such deviations.
There are two detailed studies on the determinants of life insurance demand, one taking into consideration only the Asian countries and the other based on 68 economies.
The former study by Ward et al. (2003) and the later by Beck et al. (2003) evolves around the issue of finding the cause behind variations in life insurance consumption across countries. After almost three decades of empirical work in this direction, it is still hard to explain the anomalous behaviour of Asian countries with higher savings rate, large and growing population, relatively low provision for pensions or other security and a sound capital market but comparatively low per-capita consumption of insurance. Except Japan, most of the Asian countries have low density and penetration figures.
The two main services provided by life insurance: income replacement for premature death and long-term savings instruments, are the starting point for Beck et al. (2003). They considered three demographic variables (young dependency ratio, old dependency ratio and life expectancy), higher levels of education and greater urbanization as independent factors in explaining insurance demand.
Economic variables like Gini index and Human development index are new additions along with institutional variables reflecting political stability, access to legal benefits and an index of institutional development were used.
The analysis considering the time period 1961 to 2000 shows that countries’ with developed banking system, high income and lower inflation have higher life insurance consumption.
The association of insurance demand with demographic is not statistically strong however older the population, higher tends to be insurance consumption. The luxury good nature of insurance did not reflect through its association with income distribution.
In contrast to Beck et al. (2003) results, the study by Ward et al (2003) is indicative of the fact that improved civil rights and political stability leads to an increase in the consumption of life insurance in the Asian region as well in the OECD region.
Following Laporta et al (1997, 1998, and 2000) works relating to supportive aspect of legal environment for finance, they too considered the same in determining insurance demand. Analyzing the data from 1987 through 1998 for OECD and Asian countries, they observed that income elasticity between developed economies and emerging economies are consistent with “S-cure” insurance growth findings by Enz (2000).