An International Analysis of Life Insurance Demand

Introduction The service sector of the world economy has grown substantially since World War II. In 1989, the service sector accounted for approximately 60 percent of the world's gross domestic product (United Nations Conference on Trade and Development, 1990). The worldwide insurance industry, which makes up a significant portion of the service sector, has grown at a rate of over 10 percent annually since 1950. This growth rate has far exceeded that of economic development globally (United Nations Conference on Trade and Development, 1972, 1991; Dowling, 1982; and Swiss Reinsurance Company, 1990a). Table 1 presents data on the worldwide insurance industry, which has grown even more rapidly in recent years, at a rate of approximately 24 percent annually from 1984 to 1988. Rapid growth in the life insurance sector has contributed much to this increase. The life insurance industry has grown at a rate of approximately 30 percent annually, while the nonlife industry has grown at a rate of 19 percent annually during this period. The share of total insurance premium volume accounted for by life insurance first exceeded the share of nonlife business in 1987, and the gap has widened since that time (Swiss Reinsurance Company, 1990b). The share attributable to the life insurance sector increased from 43 percent of the total premium volume in 1984 to 53 percent in 1988. The life insurance industry has grown from 2.1 percent of world gross domestic product in 1984 to 3.4 percent in 1988. Table 1 World Premium Volume in 1984 and 1988 Premiums in Millions of U.S. Dollars Percent Share in Total Total Nonlife Life Total Nonlife Life 1984 498,000 281,500 216,500 100 57 43 1988 1,171,000 555,100 615,900 100 47 53 Source: Swiss Reinsurance Company (1986, 1990b). While the worldwide insurance market, especially the life insurance market, has grown rapidly and the internationalization of the insurance business is becoming more widespread, these areas have not been greatly researched. Skipper (1987) classified and discussed the nature of protective barriers in international insurance services and provided an analysis of the protectionists' rationales. Shroath and Korth (1989) examined the foreign market entry patterns of U.S. property-liability insurers. Beenstock, Dickinson, and Khajuria (1988) studied the relationship between property-liability insurance expenditures and income for 12 industrialized countries. Outreville (1990) investigated the relationship between property-liability insurance premiums and the economic and financial development of 55 developing countries. Weiss (1991) examined the productivity of the property-liability insurance industries in the United States, West Germany, Switzerland, France, and Japan. Cummins (1973) studied the effect of macroeconomic variables on the U.S. life insurance industry and found life insurance and insured pension reserves are correlated with GNP and permanent income. This article identifies the factors that lead to variations in the demand for life insurance across nations. In the next section, we set forth a model of the demand for life insurance. Each of the factors expected to affect the demand for life insurance is discussed and the hypotheses of the study are formulated. The empirical model used to test the hypotheses is then presented. The article concludes with a discussion of the major findings and suggestions for future research. The Theory of the Demand for Life Insurance Theoretical models of the demand for life insurance have been derived by Yaari (1965), Fischer (1973). Pissarides (1980), Campbell (1980), Karni and Zilcha (1985, 1986). Lewis (1989), and Bernheim (1991). The models view life insurance as the means by which uncertainty in the household's income stream, related to the possible premature death of a household's primary wage earner, is reduced. …