Demand Analysis of Life Insurance

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Introduction

The service sector of the world economy has grown substantially. 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. 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. Lewis's (1989) treatment of the demand for life insurance differs from prior studies by setting the household's goal as maximization of the beneficiaries' expected lifetime utility. Earlier studies were based on the assumption that life insurance is purchased to maximize the lifetime utility of the individual purchasing the life insurance product, the primary wage earner. Lewis's analysis is consistent with the life insurance literature that suggests life insurance should be purchased to satisfy the needs of survivors (see, for instance, Rejda, 1986). His model does not explicitly rely on the primary wage earner having a bequest motive. However, it does require that the preferences of the beneficiaries be the basis for the amount of life insurance purchased by the household.

Factors Affecting the Demand for Life Insurance

Here, we apply Lewis's theoretical findings to the analysis of the international demand for lite insurance by assuming that the inhabitants of a country are homogeneous relative to those of other countries....
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