The demand for life insurance in OECD countries

Journal of Risk and Insurance, Sept, 2007 by Donghui Li, Fariborz Moshirian, Pascal Nguyen, Timothy Wee

CONCLUSION

In this article, we have analyzed the determinants of aggregate life insurance demand on a cross-section of developed economies. Our sample of OECD countries exhibits structural similarities, yet also exhibits enough differences to draw interesting observations compared with other international studies (e.g., Browne and Kim, 1993; Outreville, 1996; Beck and Webb, 2003).

Consistent with previous research, we find that income plays a major role in the consumption of life insurance products. An increase of I percent in aggregate income can be expected to induce at least a 0.6 percent increase in aggregate life insurance demand. All the socioeconomic factors considered play a significant role in the demand for life insurance. Most important, they are consistent in each and every point with the dependents' expected lifetime utility theory developed by Lewis (1989). In particular, the demand for life insurance decreases with the average life expectancy (lower probability of death) and increases with the dependency ratio (number of dependents). Furthermore, education level is positively related to life insurance demand, whereas the influence of social security expenditure is significantly negative. Overall, households in OECD countries appear to evaluate the expected benefits of life insurance in terms of derived benefits conditional on the income earner's death as well as the risk of the income earner deceasing prematurely.

There is also evidence to suggest that product market characteristics play a significant role ill the demand for life insurance. High level of financial development and high degree of competition in the life insurance sector both stimulate life insurance consumption. On the other hand, inflation significantly decreases the demand for life insurance. High real interest rates do not persuade households to purchase more insurance, but actually stimulate them to reduce their purchase either because of higher expected benefits for the same invested amount or because of higher preference for immediate consumption relative to deferred consumption. All considered, aggregate life insurance demand is better explained when both product market and socioeconomic factors are jointly taken into account. The article also shed light on some inconsistencies reported in previous studies. By using the more robust GMM estimation technique, we find that some coefficients, estimated via OLS regression having the opposite sign to that suggested by theory, lack statistical significance. We also show that failing to control for product market conditions may result in biased estimates. For example, life expectancy displays a positive and significant influence on life insurance demand in the model excluding product market variables. Similarly, the dependency ratio is found to have a negative association with life insurance demand. However, when product market variables are included in the regression to account for the financial attractiveness of life insurance products, both life expectancy and dependency ratio recover the appropriate signs suggested by Lewis (1989).