The demand for life insurance in OECD countries

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

Reflecting the conflicting indications of previous studies that have sought to determine its effect, social security expenditure appears to have a mixed influence on life insurance demand. The OLS regression on Model 1 suggests that life insurance demand is positively related to social security expenditure. Hence, it would appear as in Browne and Kim (1993) that social security expenditure reflects the high level of wealth of a country and should therefore be associated with higher life insurance demand. In a longitudinal survey of U.S. households, Bernheim (1991) finds similarly that social security payments stimulate the purchase of life insurance. However, the equivalent GMM regression underlines the lack of robustness of this relationship. In addition, the inclusion of product market characteristics in Model 3 supports the opposite view that higher social security expenditure acts as indirect compulsory life insurance consumption and, consequently, induces Lower voluntary life insurance consumption. This result is consistent with Lewis (1989) and confirms the findings of Beenstock, Dickinson, and Khajuria (1986), who also focus on developed economies.

The country's level of financial development appears to be a strong determinant of its life insurance consumption. As they accumulate more financial assets, households also purchase more life insurance. Acting as a proxy for financial wealth accumulation, the M2/GDP ratio displays a positive and significant correlation with aggregate life insurance consumption. The results indicate that life insurance presents an attractive alternative to standard investment products (stocks and bonds) as suggested by Fortune (1973) and Headen and Lee (1974).

Foreign market share variables (FMSHRE and its square) appear to suggest that high foreign life-insurer participation stimulates the sales of life insurance products. The negative effect of foreign participation, coupled with a positive effect of its square, indicates a lower influence at intermediate levels and a high influence at low and high levels of foreign participation. The rationale for this pattern may be that low foreign market shares are associated with highly saturated markets, where life insurance consumption is already high. On the other hand, high foreign market shares suggest highly competitive markets, which stimulates the sales of life insurance. This view is consistent with studies that evidence the positive effect of sales force and marketing effort in promoting insurance sales

Finally, inflation and real interest rates are seen to have a statistically significant negative influence on life insurance consumption. The negative impact of inflation confirms the findings of Babbel (1981) that anticipated inflation depresses the value of financial assets and therefore reduces the attractiveness of life insurance products. Although macroeconomic conditions in OECD countries largely differ from those in developing countries, the same negative influence is observed. The negative influence of real interest rates stands in contrast to Beck and Webb (2003). The result suggests that households are not attracted by lower prices to increase their purchase of life insurance, but appear to take advantage of higher real rates to reduce their investment in life insurance without giving up future benefits. Another explanation is that real rates measure the preference for immediate as opposed to deferred consumption. Higher real rates are therefore associated with a lower demand for life insurance, which converts the policyholder's current consumption into future consumption in favor of the policy's beneficiaries.