An Analysis of Life Insurance Demand

Determinants for Selected Asian Economies

and India

Subir Sen
Senior Lecturer
[email protected]
 An Analysis of Life Insurance Demand
Determinants for Selected Asian Economies
and India
Subir Sen

Abstract
During the post-1990 period, services sector in most of the Asian
economies witnessed growth fuelled by substantial changes in the financial
sector of these economies. The insurance industry, in most of the Asian
economies, ASEAN and SAARC economies in particular, was publicly
owned and remained isolated from participation of either domestic private
insurers or foreign insurers or participation of both. But, regulatory reforms
and policy changes in the ASEAN economies during the post-financial
crisis period and the process of economic liberalization in some of the
SAARC countries and China led to phenomenal changes in the growth
pattern of the insurance industry in these economies. This study is divided
into two parts: the first part is focused on four SAARC countries, two
countries from Greater China Region and six ASEAN countries for the 11-
year period (1994-2004) to understand economic and other socio-political
variables, which may play a significant role in explaining the life insurance
consumption pattern in these economies. Secondly, an independent
exercise is undertaken to re-assess whether or not the variables best
explaining life insurance consumption pattern for twelve selected Asian
WORKING PAPER 36/2008 MADRAS SCHOOL OF ECONOMICS economies in the panel are significant for India for the period 1965 to
Gandhi Mandapam Road 2004. Some variables were strongly capable of determining life insurance
September 2008 Chennai 600 025 demand in both the analytical exercises. However, we also observed
India
contradictions to earlier studies.
Phone: 2230 0304/ 2230 0307/2235 2157 JEL Classification: G22, C33, C32,
Price: Rs. 35 Fax : 2235 4847 /2235 2155
Keywords: Life Insurance, Insurance Demand, Panel Estimation, Time
Email : [email protected]
Website: www.mse.ac.in Series Analysis.
 Acknowledgements 1. Introduction
The growth of the services sector in the Asian economies has
This work was a result of constant support and motivation from led to substantial changes in the financial sector. The aftermath of Asian
my research Supervisor Prof. S Madheswaran at ISEC, Bangalore. I thank Financial Crisis, affecting the ASEAN economies in particular, saw these
Max NewYork Life Insurance Company Ltd. India for sponsoring and economies resorting to more regulatory measures to enhance delivery
financially supporting presentation of the research findings at the 11th of products with minimal risks and failures. The countries surrounding
APRIA meeting, 2007 in Taipei. We thank Prof. J W Kwon, Dr. Ian Webb, the ASEAN economies also went through a phase of economic-
B P Vani and the participants of APRIA meeting 2007 for their valuable restructuring, the most notable event being the impact of China’s accession
suggestions and insightful comments. to WTO1. The insurance industry in most of the Asian economies were
both publicly owned and operated. The Government monopoly kept this
segment of the financial market isolated from domestic private or foreign
participation. Barring a few exceptions2, the insurance market, on an
average, remained underdeveloped in terms of insurance density and
penetration. Regulatory changes since mid eighties for opening up of
these markets to private and foreign insurers have been luring global
heavyweight insurers to enter these economies. As more suppliers enter
these markets, the issue is to re-examine the factors that probably elevate
demand for insurance products. This study on four SAARC countries,
two countries from Greater China Region and six ASEAN countries, deals
with this particular issue. After reviewing existing theoretical as well as
empirical literature, we list out a set of variables explaining insurance
consumption and categorize them as economic, demographic, legal and
socio-political variables. Following this, some of these variables were
used to understand whether or not they explain insurance consumption
in the twelve selected Asian economies. Next, we use a time series
1
Refer Chen and Shih (2004).
2
The Japanese insurance industry is highly developed.

1
framework to assess how many such significant variables can explain that give rise to its economic value. But his idea was normative in nature
insurance consumption, and hence, demand for India. as it suggested ‘how much’ of life insurance was to be purchased and not
‘what’ was to be purchased. However, There were no guidelines regarding
The paper is organized as follows. The paper begins with the the kind of life policies to be selected depending upon the consumers
theoretical as well as empirical review of literature on demand for capacity and the amount of risk to be ‘insured’ in the product.
insurance. Based on the review, we identify the broad researchable issues.
The methodological section is divided into parts explaining briefly the Economic value judgments are made on both the normative as
selection of twelve Asian economies and India followed by choice of well as positive issues. Subsequent studies by Yaari (1965), Mossin (1968),
dependent and independent variables and different sources from where Hakansson (1969), Fisher (1973), Borch (1977) Pissarides (1980)
we have collected information on such variables. Next, we specify the Campbell (1980) Karni and Zilcha (1985 and 1986), Lewis (1989),
two separate econometric methodologies that are applied in this paper. Bernheim (1991) and others gradually incorporated these positive issues.
The results of the empirical exercises and interpretations are presented Their studies assimilated developments in the field of risk and uncertainty
followed by the section summarising the important observations and draw following contributions from von Neumann and Morgenstern (1947), Arrow
conclusions. (1953), Debreu (1953), to mention a few. The economics of insurance
demand became more focused on evaluating the amount of risk to be
2. Review of Literature shared/distributed between the insured and the insurer rather than the
2.1 Theoretical Studies questions and methods for evaluation of life or property values at risk.
The main purpose of this study is to re-assess the validity of This was mostly due to association of risk(s) with individual life or property
arguments emerging from the existing theoretical and empirical research that called for an economic valuation of the cost of providing insurance.
works that there are a few variables which can significantly explain the
current and future demand pattern for life insurance products. To Life insurance is considered to be a form of saving, competing
strengthen the researchable issues for the study, we will briefly discuss with other forms of saving (like bank deposits, securities, and other
selected theoretical studies which had identified indicators motivating contractual savings) in the market. However, the theory of life insurance
life insurance demand and consumption. demand was developed through the life-cycle hypothesis of consumption.
In the macroeconomic literature, Keynesian consumption hypothesis,
Studies on life insurance consumption dates back to Heubner permanent income hypothesis together with the life cycle models explains
(1942) who postulated that human life value has certain qualitative aspects individual consumption patterns in relation to income, price and interest

2 3
levels. For example, as developed by Borch (1990), consider a person The role of insurance in equation (1) has been predominantly to
with income and consumption represented by a continuous function of smoothen out consumption over time, make bequests, and repay debts
time; y t  and c t  respectively; his net saving (positive or negative) or to ensure a constant income stream after retirement. The ongoing
over the time interval 0 to t (t being the time of retirement) is given by discussion also reveals that individuals’ current income and future
the difference between income and utility maximising consumption; given anticipated consumption expenditure plays a crucial role in determining
interest rates for each interval. Income rates become more rapid as the the amount of insurance to be purchased4. The importance of rate of
person approaches t, ceteris paribus, increases savings. interest or an ‘impatience’ factor reflecting future preference patterns is
t also worth considering. This is because preferences over different
 e y  s   c  s d s
t  t
s t   e (1) consumption pattern vary from person to person and there are ‘qualitative’
0
factors which affects such preferences (Borch, 1990).
where,  is the rate of interest.

Simple models of insurance demand were proposed by Pratt

Every person wishes to consume as much as possible, but fail to
(1964), Mossin (1968) and Smith (1968) considering a risk averse decision
do so. Constraints such as debt, premature death and failure to leave
maker endowed with an initial wealth level. The results indicate that
any bequest might severely affect his savings.
demand for life insurance varies inversely with the amount of wealth an
individual possesses. Hakansson (1969) examined bequest motive in
Considering the uncertainties associated with the time of death,
considerable detail using a discrete-time model of demand for financial
equation (1) can be extended to show that an individual can enhance his
assets in general and life insurance purchase in particular. Pissarides
life time utility via purchase of a life insurance policy (pure endowment
(1980) extended Yaari’s work to prove that life insurance was theoretically
insurance) and can leave a bequest sum as a portion of his income for
capable of absorbing all fluctuations in lifetime income. Karni and Zilcha
dependents (Yaari, 1965). Borch (1990) proposed sufficient conditions
(1985) developed a methodology towards measuring individuals’ risk
and showed that saving through life insurance takes place at a higher
perceptions (risk averse or otherwise) and how such perceptions affect
rate of interest than conventional saving3 and therefore, escalation in
insurance demand. An important observation made by Mossin (1968)
interest rates will have minimal impact on life insurance demand as in
was regarding insurance coverage as an inferior good. However, Hoy
this case, consumption is for maximising utility.
and Robson (1981) presented a theoretical explanation and later Briys et
4
We have abstained from any discussion regarding the form in which insurance is
3 purchased
Please refer Borch (1990) Chapter 4 for details.

4 5
al. (1989) generalised the results showing insurance to be a ‘Giffen’ good. In short, the theoretical review yields variables like income, rate
Lewis (1989) using a theoretical model concluded that the number of of interest, current consumption and accumulated savings in wealth form
dependents also influences the demand for life insurance. as variables influencing insurance consumption. Demographic and social
variables were also incorporated in theoretical models and their potential
The conventional utilitarian theories have been adopted to impact on an individual’s life insurance consumption decision was
determine optimal insurance consumption where individuals’ preferences investigated. Life insurance consumption increases with the breadwinner’s
over different consumption patterns are considered. Although expected probability of death, the present level of family’s consumption and the
utility theory dominated the analysis of decision making under risk, a degree of risk aversion. However, there is no concrete evidence as to
number of studies have found that individuals (consumers) identical in how many such non-economic or additional economic variables can play
all respects, might differ in their attitudes towards purchasing insurance. a role in theoretical models. In the next section, we explore selected
It is assumed in economic theory that marginal utility of money is empirical studies to highlight those variables which were significant in
diminishing and it is via maximising expected utility that individuals choose affecting insurance demand.
5
among financial investment alternatives in the light of uncertainty . Given
these two assumptions, we can infer whether or not an individual is risk 2.2 Empirical Studies
averse and will demand for insurance.
This section presents a review of empirical studies on
determinants of life insurance. Most of these studies has focused on
The ‘prospect theory’ propounded by Kahneman and Tversky
both the demand side factors and the supply side factors.
(1979) argued that individuals make decision with respect to a status
quo reference point and gains via purchase of insurance are considered
Fortune (1973) analysed the empirical implications of expected
very little against losses with respect to the reference point. The
utility hypothesis of choice under uncertainty for demand for life insurance
development of many more models during early nineties tried to describe
and concluded that demand depends on income, non-human wealth and
individual behaviour and the effects of ‘framing’ on decision making
the rate of discount. Headen and Lee (1974) studied the effects of short
(Machina, 1982 and 1987).
run financial market behaviour and consumer expectations on purchase
of ordinary life insurance and developed structural determinants of life
5
The Bernoulli’s solution to the St. Petersburg paradox states that it is expected insurance demand. They considered three different sets of variables:
utility and not expected monetary value that serves as the rational guide to decision
making (Sennetti, 1976). first, variables stimulating demand as a result of insurer efforts (e.g.

6 7
industry advertising expenditure, size of the sales force, new products education and income were significant factors affecting the demand for
and policies, etc.); second, variables affecting household saving decision life insurance in both the countries.
(e.g. disposable, permanent and transitory income, expenditure
expectation, number of births, marriages, etc.) and thirdly, variables Starting with a brief review of Lewis’s theoretical study and an
determining ability to pay and size of potential markets (e.g. net savings assumption that inhabitants of a country are homogeneous relative to
by households, financial assets, and consumer expectation regarding those of other countries, the study by Browne et al. (1993) expanded the
future economic condition). They concluded that life insurance demand discussion on life insurance demand by adding some variables namely,
is inelastic and positively affected by change in consumer sentiments; average life expectancy and enrolment ratio at third level of education.
interest rates play a role in both short and long run. The study considering 45 countries for two separate time periods (1980
and 1987) concluded that income and social security expenditures are
Using an international dataset (12 countries over a period of 12 significant determinants of insurance demand. But, inflation was found
years), Beenstock et al. (1988) found that marginal propensity to insure6 to have a negative correlation. Dependency ratio, education and life
differs from country to country and premium vary directly with real rates expectancy were not significant but incorporation of religion7, a dummy
of interest. The study tried to examine the relationship between property variable showed that Muslim countries have significant negative affinity
liability insurance premium and income. Truett et al. (1990) discuss the towards life insurance.
growth pattern of life insurance consumption in Mexico and United States
in a comparative setting, during the period 1964 to 1984. They assumed Based on a cross-sectional analysis of 45 developing countries,
that at an abstract level, demand depends upon the price of insurance, Outreville (1996) analysed the demand for life insurance for the period
income level of individual, availability of substitutes and other individual 1986. The study considered variables like agricultural status of the country
and environment specific characteristics. Further, they experimented with in terms of percentage of agricultural labour force in total labour force;
demographic variables like age of the insured and size of population health status of the country in terms of amenities like percentage of
within the age group 25 to 64 and also considered education level of the population with access to safe drinking water; percentage of labour force
population under study to examine its bearing on insurance consumption with higher education and the level of financial development. Some of
decision. Their results show the existence of higher income inelasticity
7
of demand for life insurance in Mexico at low income levels. Age, level of “Religion can provide weights into individuals … and life insurance consumption
is less in predominantly Islamic countries” studies by Douglas et al. (1982),
6
Marginal propensity to insure is defined as increase in insurance spending when Henderson et al. (1987), Zelizer (1979) and Warsaw (1986): cited in Browne et al
income rises by 1US $ (1993) page 621.

8 9
the variables already discussed above were also considered. Two dummy long run forecast for life insurance demand. Observing the outlier countries
variables were used to reflect competition in the domestic market and or countries distant from the S-curve plot, it is possible to identify structural
foreign insurer participation. The results show that personal disposable factors like insurance environment, taxation structures, etc. resulting in
income and level of financial development significantly relates to insurance such deviations. Therefore, this study too provides meaningful explanations
development. Since the political philosophy regarding market openness for variables which can explain insurance consumption.
varies from country to country, market structure dummy appeared to be
significant. There are two exhaustive studies on the determinants of life
insurance demand, one taking into consideration only the Asian countries
Taking into account the expansion of the service sector, Browne and the other based on 68 economies. The first study by Ward et al.
et al. (2000), tried to explain the differences in property liability insurance (2002) and the second by Beck et al. (2003) revolve around the issues of
consumption across countries. The analysis focused on the OECD countries finding the causes behind variations in life insurance consumption across
and concluded that in general, insurance purchase is influenced by various countries. Both the studies briefly highlighted the difficulties in explaining
economic and demographic conditions. A separate study based on nine the low per-capita consumption of insurance in Asian countries with higher
OECD countries examined the short run and long run relationships savings rate, a sound capital market in some of them, large and growing
exhibited between economic growth and growth in the insurance industry. population, with low provision for pensions or other social security. Except
This study by Ward et al. (2000) is a co-integration analysis using annual Japan, most of the Asian countries have low insurance density and

real GDP data and total real premiums for the period 1961 to 1996. penetration figures.

Results indicate that country specific factors8 influence the causal

relationship between economic growth and insurance market The two main services provided by life insurance: income

development. replacement for premature death and long-term saving instruments were
the starting point for the study by Beck et al. (2003). They considered
Allowing income elasticity to vary as GDP grows for an economy, three demographic variables (young dependency ratio, old dependency
Enz (2000) proposed the S-curve relation between per-capita income ratio and life expectancy), higher levels of education and greater
and insurance penetration. Using this one factor model one can generate urbanization as independent factors in explaining insurance demand.
Economic indices like Gini index and human development index were
8
Country specific factors referred to here are attitudes towards risk and risk
new additions along with institutional variables reflecting political stability,
management, regulatory factors, legal environment, other modes or availability of
financial intermediation, etc. access to legal benefits and an index of institutional development. The

10 11
analysis for the time period 1961 to 2000 shows that countries with Zietz (2003) and Hussels et al. (2005) have reviewed the efforts
developed banking system, high income and lower inflation had higher of researchers to explain consumer behaviour concerning the purchase
life insurance consumption. The association of insurance demand with of life insurance for almost 50 years. These reviews suggest that the
demographic characteristics was statistically weak. But, older the bulk of empirical exercises found a positive association between increase
population, higher tends to be the insurance consumption. Insurance as in savings behaviour, financial services industry and demand for life
a luxury good was not reflected through its association with income insurance. Taking this forward, our first issue is to see whether or not
distribution. per capita gross domestic savings and financial depth influence life
insurance consumption. GDP and Per-capita GDP are often highly
In contrast, the study by Ward et al (2002) is indicative of the correlated with the proxy variables measuring insurance demand:
fact that improved civil rights and political stability leads to an increase in Insurance density and penetration. We therefore ignore these two
the consumption of life insurance both in the Asian and OECD regions. variables and assume that as income grows, it will add to insurance
Following Laporta et al (1997, 1998, and 2000) works relating to supportive demand via rise in the savings component i.e., GDS.
aspect of legal environment for finance, they too considered the same
legal variables in determining insurance demand. Analyzing the data from The demographic factors such as dependency ratios, life
1987 through 1998 for OECD and Asian countries, they observed that expectancy and adult literate population are considered and, in line with
income elasticity between developed economies and emerging economies earlier studies, we expect these to be significant in explaining life insurance
are consistent with “S-curve” insurance growth findings by Enz (2000). demand. It is expected that young dependency ratio will be negatively
related and the rest three demographic variables are expected to have a
3. Issues and Questions positive relation. We have assumed first that consumer price index (CPI)
The major issue to start with would be to re-examine the will be the best proxy for inflation although we have considered log
significant variables that can best fit as determinants of life insurance difference of CPI as an alternative measure for inflation. Lastly we have
demand. Recently, there are a number of studies on single economies: the real interest rate, which in our case, is the deposit interest rate

Hwang and Gao (2003) focused on the Chinese economy; Lim and minus inflation. In Table 1, we present our identified ‘potential’
Haberman (2004) considered Malaysia; and Hwang and Greenford (2005) determinants of life insurance consumption with the expected signs for

again on Mainland China, Hong Kong and Taiwan. Lenten and Rulli (2006) the cross-sectional analysis.

explored the time series properties of the demand for life insurance in
Australia using a novel statistical procedure that allows unobservable As already mentioned, this study has two analytical parts and

components to be extracted. hence when it comes to researchable issues we are actually trying to

12 13
examine the same set of researchable issues using two separate also struggling to overcome poverty. Except Hong Kong and Singapore,
methodologies. First, we try to infer which variables can significantly most of the countries have less than USD 5000 GDP per capita. Six of the
explain insurance consumption in 12 selected Asian economies. Second, selected economies in our sample have GDP per capita of less than USD
we use separate data set and cross check whether variables significantly 1000. One of the hurdles in empirical exercises pertaining to developing
determining insurance consumption in panel are turning out to be economies is either limited or non availability of proper macro-economic
significant in the Indian case or not. Differences in results are possible data. The availability of data was one key motivating factor behind
since some of the variables used in the panel and time series analysis selection of economies.
are either different or are considered for a much longer time period. But,
considering the ‘universality’ of some variables, we hypothesise that the The overall spending on insurance and related products in these
importance of such variables like income, etc. (in terms of expected sign) economies is very low when compared to the OECD economies. With
in explaining insurance demand will hold true under different frameworks. population growth rate above or near 1 percent and a comparatively low
level of insurance consumption – measured by per capita premium, there
For the time series analysis on India, we have included variables ia an indication of the existing economies of scope and the potential for
GDP per-capita, total dependency ratio, crude death rate and urban growth. Although, some of these economies were gripped by the Asian
population growth rate which are supposed to positively stimulate growth Financial Crisis, the issue is to create stronger infrastructure for financial
but our price variable is expected to be inversely related. services and thereby boost the underdeveloped insurance market.

4. Methodology These economies display immense diversity in ethnicity, culture

Determinants for 12 Asian Economies: The study focuses on 12 and religion. The legal system too varies, though most of them following
selected economies - 4 from the 7 SAARC9 countries (India, Bangladesh, the European legal system due to their colonial influence. Following the
Pakistan and Sri Lanka); 2 from the Greater China region (China and General Agreement on Trade and Services (GATS), most of these
Hong Kong) and 6 from the ASEAN10 (Indonesia, Malaysia, Philippines, economies agreed to open up their financial sector in general and
Singapore, Thailand, and Vietnam) group. These 12 nations, apart from insurance in particular, to either domestic private companies or foreign
being the most promising emerging and growing economies, they are companies or both. Table 5 shows that most of these countries were
9
South Asia Association for Regional Cooperation; the rest 3 countries are Maldives, dominated by a large number of insurers but their insolvencies called for
Nepal and Bhutan
10
The Association of Southeast Asian Nations and the other members are Brunei
nationalization. It was in the beginning of 90s that regulatory changes
Darussalam, Cambodia, Laos and Myanmar. were initiated and implemented which once again opened the insurance

14 15
industry but with more cushions in terms of regulation and supervision. analysis uses insurance business data available for the period 1965 to
The 11-year period considered for this study from 1994 to 2004, witnessed 2004 from the Life Insurance Corporation of India and Insurance Regulatory
important regulatory changes. During this period, in most of the economies and Development Authority’s Annual Reports. Data on economic and
expansion of life segment of the insurance market gained a particular demographic variables are collected from WDI 2006, available in local
momentum. This helped to rejuvenate insurance density. The only currency units at current prices. All the economic variables are
exception from this increasing trend was Pakistan, where actually density transformed to constant 2000 prices.
has dropped.
5. Research Design
Determinants for India: We examine the determinants explaining the Determinants for 12 Asian Economies
demand for insurance in general and life in particular for the period We construct two separate panel data regression models. The
starting 1965 to 2004. A number of changes have taken place during this models are different since life insurance demand is represented by two
selected time horizon. In 1956, the life segment was nationalized: We different dependent variables: Insurance penetration and insurance
witnessed a war and a famine which had adversely affected the economy; density. We use panel data because of its advantages in obtaining greater
in the late eighties, the process of liberalisation was initiated with the sources of variations which allow far more efficient estimation of the
financial sector reforms in 1991; and lastly 1999 marked the re-opening parameters and ability to control for individual (cross-section)
of the insurance market and establishment of IRDA. The dependent heterogeneity. The estimation procedure can identify and estimate effects
variables considered are insurance penetration, insurance density and which are difficult to determine via pure cross sections or pure time
net premiums. series data11.

Data Source: The panel for 12 selected Asian countries studied for 11 The specifications of the models to be estimated are as under:
years starting from 1994 to 2004 is constructed using annual aggregate logPEN it   i  1 log GDSPC it   2 logFIND it
data from different secondary sources. The Insurance premium figures
  3URBit   4 logYDRit   5 logODR it   6 log ADL it
are collected from various issues of Sigma, a publication from Swiss Re.
  7 logLEXR it   8 RIRit   9 (1/ CPI )it   it (2)
The Economic as well as demographic variables used are collected from
the International Financial Statistics (IFS) 2006 and the World Development
Indicators (WDI) 2006. The explanatory variables in the model are the 11
For complete discussion on Panel Data models please refer to Baltagi (2005) and
economic and demographic variables (refer Appendix: 1). The time series Hsiao (2003).

16 17
logDEN it   i  1 log GDSPC it   2 log FIND it Determinants for India

  3URBit   4 log YDR it   5 logODR it   6 log ADL it We begin our analysis by testing the time-variant variables for
seasonality. We next make appropriate transformations to make the
  7 log LEXRit   8 RIRit   9 log 1 / CPI it   it (3)
estimation process free from biases arising due to seasonality of variables
Where, PEN = Insurance penetration; DEN = Insurance density; used. However, variables of rate value were not transformed because
GDSPC = Gross Domestic Savings per-capita; FIND = Financial depth;
URB = Urban population; YDR =Young dependency ratio; ODR = Old they are already in a preferred form as they are a measure of change.
dependency ratio; ADL = Adult literacy rate; LEXR = Life expectancy at Based on this rationale, the variables of rate value form, i.e., PEN, DEN,
birth; RIR = Real interest rate; and CPI = Consumer price index.
INFR, RIR, TDR, ODR, YDR, CDR, LEXR and urban population growth rate

Here, subscript i denotes the country, the subscript t represents (URBGR) were not subjected to any transformation13. GDP per-capita,

time, i are cross-sectional intercept terms, ’s are the slope parameters GDS per-capita, FIND, PRICE, and PREM of the level value form were

and it and íit are random error terms. The model argues that variations transformed by taking the natural logarithm of their level values so that

in the independent variables in the 12 selected economies may contribute their coefficients represents elasticity.

to insurance penetration and insurance density.

To investigate the stationary properties of the selected regressors,

To address the problems of estimation and inference associated we have considered two different tests: the Augmented Dickey Fuller

with panel data, we estimate both the fixed effects model (FEM) and the (ADF) Test and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) Test.

random effect model (REM). The FEM does not assume any time effect
and focuses only on cross section effects. An incorporation of a dummy Augmented Dickey Fuller (ADF) Test: This test is based on the model

in (2) and (3) will automatically restrict us to look only for cross section of the form,
p 1
specific effects. Therefore, although we discussed some of the control yt   yt 1    *j yt  j  ui (4)
j 1
variables specific to religion, market structure and regulation, we have
and the pair of hypothesis is; H 0:   0 versus H1:   0
not considered the same as our objective is to estimate effects of time
variant variables. The REM assumes exogeneity of all the regressors
The t-statistics is calculated for the co-efficient  from an OLS
with random individual effects12. The decision regarding the best model
estimation of (i) (Dickey and Fuller, 1979). The null hypothesis is rejected
between FEM and REM is arrived at using the Hausman test.
13
Refer Appendix 1 for a complete discussion on the explanatory and explained
12
Mundlak (1978) cited in Hsiao (2003). variables, their abbreviations and for data sources.

18 19
if the calculated t-statistics is less than the critical value and implies that
FIND, GDPPC ,GDSPC, INFR, RIR, PRICE , 
the series is stationary and vice versa. PEN  f   (6)
 LEXR, CDR, URB, ODR, YDR 

Kwiatkowski-Phillips-Schmidt-Shin (KPSS) Test: The integration  FIND, GDPPC ,GDSPC, INFR, RIR, PRICE , 
DEN  f   (7)
properties of a series yt, may also be tested against a unit root (the null  LEXR, CDR, URB, ODR, YDR 
hypothesis that the series is stationary)
Where, GDPPC = Gross Domestic Product per-capita; INFR = Inflation
rate and CDR = Crude death rate.
H 0: yt ~I0  against H1: yt ~I 1

6. Results and Interpretation

Kwiatkowiski et al., (1992) has derived a test for this pair of hypotheses.
Determinants for 12 Asian Economies
If there are no linear trend term than, they start from a yt  xt  zt ;
We have dropped GDP per-capita to reduce the high level of
where xt is a random walk and xt  xt 1  vt , where vt ~ iid 0,  v  2

correlation in the fixed effects model and have considered the inverse of
and zt is a stationary process. The new pair of hypotheses is now:
CPI as an indicator of inflation. The discussion in this section is based on
H 0:  v2  0 against H1:  v2  0 . the final results of the models and the summary results are reproduced
in Table 4.
The test statistics proposed is as under:
T
1 2
KPSS  S t / ˆ 2 (5) Our results based on the balanced panel, allow us to exploit
T2 t 1
t both cross-country and time-series variation in the data. The fixed effect
where, S t   ̂ j ; ̂ t  y t  y and ˆ 2 is an estimator of model (Model 1) shows that variations in insurance penetration are
j 1
the longrun variance of the process zt. The null hypothesis of stationarity explained by GDS per-capita, financial depth, urbanization, old dependency
is rejected for larger values of the test statistics KPSS and vice versa. ratio, adult literacy, life expectancy and measure of inflation. But, in the
random effect model (Model 2), financial depth, old dependency ratio
Based on the two test results, all the series were transformed in and inflation turn out to be significant. From the fixed effects regression,
order to make them stationary. The dependent variables used in this the F statistics for testing the joint significance of the country effect is
time series analysis are insurance penetration and insurance density. 13.19 {F [11,105]}. This is greater than the critical value and the evidence
The models estimated are of the form: is strongly in favour of country effect in the data. Also, the Hausman test

20 21
for the fixed and random effect regressions give the test statistics 101.89 Young dependency ratio has the expected sign but it was found
with 9 degrees of freedom. The critical value of chi-square with 9 degrees to be insignificant in all the 4-models. Old dependency ratio is significant
of freedom is 16.92 at 95 percent level of significance. Thus, we can but again its relationship with demand proxies does not corroborate with
reject the fact that the individual effects are uncorrelated with other earlier studies. It suggests that rising old dependency ratio will taper off
regressors in the model. This further suggests that of the two alternatives demand. Interestingly, the implication of overall education in an economy
we have considered, the fixed effects model (Model 1) is a better choice. as studied via using adult literate population variable was statistically
significant but failed to confirm the expected relationship. This might
Similarly, when we use insurance density as the dependent probably give rise to the issue whether or not higher education or a
variable to see the impact of variations of the independent variables, certain minimum, guarantees awareness of insurance benefits. The last
fixed effects model (Model 3) turns out to be a better choice. Model 3 of the demographic variable studies, the life expectancy of the total
also suggests that there is a significant relation between GDS per-capita, population at birth, was highly significant and suggests that as living
financial depth, urbanization, old dependency ratio, adult literacy, life conditions improve enhancing longevity of life, demand for insurance
expectancy and inflation. products would go up. As expected, inverse of inflation is inversely related
with density and penetration and is significant but real interest rate is
The regression results obtained from Models 1 and 3 show that not. The relation between inflation with the demand proxies does not
GDS per-capita is having a positive relationship with insurance density corroborate with earlier studies and hence we conclude that current
and penetration, respectively. This suggests that, as savings activity interest rate or price situation does not affect insurance consumption
increases, it will push up per capita insurance expenditure and thereby decisions.
enhance insurance demand. The significant positive relation between
density and penetration with financial depth suggests that as the financial Determinants for India
sector strengthens, insurance sector too will benefit. Although urbanization The results obtained are surprising and re-inforces one to probe
is significant, its sign is contradictory to earlier studies and fails to fulfil further why most of the determinants successful in determining the
our expectation that the level of urbanization in an economy raises demand for insurance in the cross country analysis fail to explain the
insurance consumption. For the present study, it suggests that urbanization Indian scenario. We have considered two dependent variables (i.e.,
will decrease insurance consumption. This may be as a result of rural- insurance penetration and density) and tried to explain the variation in
urban migration and a raising share of poor population in the urban these by set of economic variables (income, savings, prices of insurance
centres in most of the selected economies. product, inflation and interest rates) and demographic variables

22 23
(dependency ratio, life expectancy at birth, crude death rate and consumption, economic variables of importance would be gross domestic
urbanization). The results obtained are presented in Table 7. savings, level of financial sector development and inflation. As specialized
financial institutions turn to financial conglomerates, one important policy
The analysis shows that income (GDP per-capita), financial depth,
implication can be the strength and weaknesses of banking and other
per policy price of insurance products and real interest rates are significant
non-banking institutions which might have a positive or negative spill-
variables. Among the demographic variables, urbanization i.e., the growth
over effect on the insurance industry. As more banks line up for insurance
rate of urban population as a percentage of total population is significant.
service provision, the entry of these institutions will also push up demand.
In terms of the sign, the results are contradicting our expected signs.
Our analysis suggests that as the savings increase they raise insurance
Income is inversely related to the demand insurance penetration but in
consumption. But insurance as such is not purely savings, and hence, its
line with expectation is positively related to insurance density. Financial
depth has a positive relation with both penetration and density suggesting purchase may smoothen the income or wealth, over time. If savings plus

that as the financial system as a whole grows; it will have a positive life risk insurance products are sold, it might boost insurance consumption.

impact in raising demand for insurance products. In other words, we can Although real interest rate was not significant in our cross country analysis,
say that as the traditional boundaries break between specialized financial it turned out to be significant in our time series analysis. Some variant of
institutions, the overall involvement in financial sector in different business it may also play an important role in explaining individuals’ choice between
would lead to better supply of insurance products and thus raise demand insurance and other saving instruments.
further. Price is expected to be inversely related to demand. But, here it
shows that in all the four different models, it has a positive association Our results based on panel of 12 economies over 11 years,
and suggests that ‘a higher insurance cost encourages purchase of
supports the fact that demographic variables like life expectancy, young
insurance’. The last of the significant variable, urbanization has a positive
and old dependency ratio, adult literacy rate and rate of urbanization are
relation and aptly corroborates with the justification that as more and
significant determinants of life insurance demand. However, the same
more urban centres are created, the demand or consumption of insurance
cannot be concluded from the time series analysis on India as only
products would increase.
urbanization had some significant relation to the demand proxies. The

7. Conclusions insignificant dependency ratios once again prove the conclusion of

Overall, our cross-country analysis confirms that if we Rosenzweig (1988) study that implicit insurance provided by networks of

exogenously consider income to be a crucial factor in explaining insurance family and friends in the case of India provide some kind of alternative

24 25
 Table 1: Determinants, Research Questions and Expected
arrangement to take care of life related risks14. Therefore, if we consider
Relationship
that the older generation in most of the low-income and developing Determinants Questions Expected
countries considered consumption of insurance as an unnecessary Sign

expense, the policy recommendation to enhance awareness among the GDP per-capita Is income a significant factor in
explaining life insurance consumption? +
current generation is via proper information dissemination.
GDS per-capita Is level of saving a significant factor in
explaining life insurance consumption? +
According to Liedtke (2007) insurance should be considered a Financial Depth Does the level of financial sector
development have any spill-over effect
key component of economic development and the best mechanism to on enhancing insurance consumption? +
take care of multidimensional risks in modern economies. It is necessary Urbanization What relation exists between the rate of
to clear the confusion regarding considering life insurance as a superior urbanization and insurance consumption? +
Total The impact of rising “dependent
or luxury good among potential consumers in developing countries with
Dependency population” on insurance consumption +
comparatively low per-capita income. But as per-capita income is steadily Ratio
creeping up in the selected economies15 with changes in the standard of Young The impact of growing population
Dependency in the 0-14 years age group _
living, the suppliers might stimulate demand and increase the availability Ratio on insurance consumption
of insurance products. This would reduce the scarce and costly outlook Old The impact of growing population
of life insurance products. The study can be extended considering more Dependency above 65 years of age on insurance +
Ratio consumption
variables and dummies to look for the country and time specific factors
Adult Literate Whether or not level of education, as an
affecting demand. The results are of importance to the policy makers if Population indicator of awareness, affect insurance +
consumption?
they are aspiring to elevate insurance density and penetration in the
Life Expectancy The effect of life expectancy on
economies. Most of the selected economies have undergone changes, at Birth insurance consumption +
particularly in terms of regulatory reforms recently. It would be useful to Crude Death The effect on number of deaths on
take a much bigger sample in terms of countries and periods considered, Rate insurance consumption +
Inflation Do price fluctuations affect
to understand why some of the variables behaved so differently than
insurance consumption? _
expected. Real Interest What is the effect of changes in
14
The information was collected from the study by Townsend(1995) which dealt Rate interest rate on insurance consumption? _
with some of the issues relating to evaluation of risk bearing systems in low- Price Does insurance price determine the
income economies.
15 demand for insurance? _
Singapore and Hong Kong are however two countries in the high-income group.

26 27
 Table 2: Life Insurance Premiums and Penetration Figures for Table 4: Panel Data Estimation
the 12 Asian Economies Model 1 Model 2 Model 3 Model 4
1994 1999 2004 Dependent Variable Insurance Penetration Insurance Density
Premiums* Density # Premiums* Density # Premiums* Density #
Independent Random Random
Fixed Effect Fixed Effect
Bangladesh 0.011 0.0001 103.71 0.81 231.48 1.66 Variables Effect Effect
China 2027.41 1.71 10752.17 8.58 30584.31 23.60 Constant -161.993* -59.125* -161.854* -66.253*
Hong Kong 2536.44 422.88 4973.26 752.73 14643. 54 2122.25 (39.091) (27.491) (39.378) (28.595)
India 3652.70 3.99 6306.50 6.31 14716.36 13.63 GDS per-capita 2.997* 0.868 3.190* 1.374
(1.0540) (0.855) (1.062) (0.875)
Indonesia 625.08 3.30 780.79 3.83 1496.19 6.88
Malaysia 1222.39 60.81 1892.14 83.32 3798.01 152.53
Financial Depth 4.268* 4.296* 4.392* 4.495*
(1.352) (1.200) (1.362) (1.209)
Pakistan 211.00 1.77 186.49 1.38 230.14 1.51
Urbanization -0.088* -0.021 -0.087* -0.020
Philippines 375.08 5.61 538.99 7.20 795.78 9.75 (0.0432) (0.016) (0.043) (0.017)
Singapore 1476.57 431.62 2837.70 718.04 6437.32 1532.70
Young Dependency Ratio -6.697 -1.617 -6.804 -1.746*
Sri Lanka 0.011 0.0006 73.80 4.05 115.46 5.95 (5.968) (3.901) (6.012) (4.042)
Thailand 1235.20 21.20 1550.48 25.74 2936.49 46.10 Old Dependency Ratio -8.448* -8.869* -8.152* -8.816
Vietnam 0.011 0.0002 35.62 0.46 442.46 5.38 (3.639) (3.388) (3.666) (3.447)

Source: Sigma (various issues), Swiss Re. Adult Literate Population -11.103 *0.752 -10.775* 0.624
* in Millions of USD at constant 2000 prices (3.212) (0.495) (3.236) (0.523)
# Life Premiums as percentage of total mid-year population
1 Total Life Expectancy 119.749* 20.271 118.448* 23.716
Figures are extrapolated
at Birth (0.249) (13.940) (22.374) (14.556)
Inflation -8.500* -10.485* -8.414* -10.149*
(4.620) (3.911) (4.654) (3.935)

Table 3: Correlations Real Interest Rate 0.119 -0.151 0.109 -0.133

(0.249) (0.284) (0.251) (0.279)
Per Capita GDS Life Penetration Density Observations 126 126 126 126
GDP Premium
F Test Statistics / 
2
13.19 101.57 13.15 134.96
Per Capita 1.000 -0.080 0.205 0.811** 0.879** 2
R Within 0.6467 0.5288 0.6598 0.5639
GDP
Between 0.0829 0.5514 0.3265 0.7086
GDS 1.000 0.817** 0.050 -0.057
Overall 0.0628 0.4627 0.2588 0.6362
Life 1.000 0.453** 0.305
Premium Hausman Test Statistics 101.89 91.03

Penetration 1.000 0.910** * Statistically significant; Figures in parentheses are standard errors
Density 1.000

** Correlation is significant at the 0.01 level (2-tailed).

28 29
 Table : 5 Development of Life Insurance Industry* Pre-
Regulatory Regulatory Foreign No. of
Economies Regulatory
Pre- Authority Change Ownership Insurers
Regulatory Regulatory Foreign No. of Re gime
Economies Authority Regulatory
Change Ownership Insurers Philippines The Insurance Private sector The Republic New foreign 34
Re gime
Commission was always Act No. 8179 insurer is
Bangladesh The Department After separation 1984 Not 18 (Komiyon ng emphasized of 1996 not allowed
of Insurance, from Pakistan Allowed Allowed 1 Public Seguro) permits 100% to hold a
headed by the in 1972, 50% private foreign composite
Insurance state-owned underwriting
ownership license
Directorate of monopoly life in 1990
the Ministry of insurer Jiban Singapore The Insurance Until 1960s the 2000 The In 2000, 8
Commerce. Bima Corporation Department of market was market was 49%
was established the Monetary loosely liberalized to restriction
in 1973 Authority of regulated direct insurers on foreign
China P.R. China Insurance PICC’s 1 monopoly 1992; Allowed; 47 Singapore ownership
Regulatory as insurer ended Interim 2002 (MAS) in local
Commission in 1985; 5 new Management Regulations companies
(CRIC) formed public insurer Regulation on Admn. was lifted
in 1998 created; 4 for foreign of Foreign- Sri Lanka The Insurance Insurance Corp. 2001, 100% Up to 90% 10
regional insurer Insurance invested Board of Sri Act in 1961 private foreign 1 Public
existed Institutions Insurance Lanka; 2001 nationalized the operation investment
allowed Comp any life insurance allowed in local
foreign
Industry to since 1986 companies
entry
form ICS4
Hong Kong Office of the Comparatively the 1997 after it Allowed; 140
Commissioner most competitive became PRC’s 104 captive Thailand The Department Market was 1992 25% of 20
of Insurance insurance market special insurers in of Insurance blocked for Insurance foreign
(OCI); 1990 with over administrative operating (of the Ministry decades till business is ownership
204 insurers region from 25 of Commerce) late 1990s relatively in domestic
countries independent liberal insurers5
from 2002
India Insurance The Life 100% private 26% equity 16
Regulatory and Insurance participation share in 1 Public Vietnam Ministry of Baoviet, a state 1999 Allowed 2 103
Development Corporation Act allowed local Finance owned life insurer 2000, foreign Public
Authority of 1956 merged since 1999 companies started operation approved & companies
(IRDA); 1999 256 life insurers in 1996 but was enacted new in 1999
to form LIC2 initially created set of laws followed by
Indonesia The Directorate —- —- Allowed 62 for non-life 2 in 2000
General for insurance
Financial
Institutions Source:
along with Kwon, W. Jean (2001) “Toward Free Trade in Services: The ASEAN Insurance Market”, IIF
Ministry of Occasional Paper, No. 3; International Insurance Foundation, Washington, DC.
Finance Kwon, W. Jean (2002) “The Insurance Markets of South Asia”, IIF Occasional Paper, No. 4;
Malaysia Ministry of In 1984 Takaful Always open Allowed 7 International Insurance Foundation, Washington, DC.
Finance de Insurance Act to Private Kwon, W. Jean (2002) “The WTO and Insurance in Greater China: The Peoples Republic, Hong
facto regulator permitted insurer Law and Kong, Macau, and Taiwan”, IIF Occasional Paper, No. 6; International Insurance Foundation,
with operations based Regulatory Washington, DC.
1
administration on Islamic changes in People’s Insurance Company of China; 2 Life Insurance Corporation of India under the control of
by Bank Negara principles. 1996. Government of India; 3 The Corporation established under Article 11 of the Life Insurance
Malaysia (BNM) (nationalization) Order of 1972 ;4Insurance Corporation of Sri Lanka, renamed the Sri
Pakistan Securities and In 1972, 34 out of 1990 100% Allowed 5 1 Public Lanka Insurance Corporation Ltd. in 1993; 5 to be lifted to 49%;
Exchange 50 existing private entry
Commission of insurers were Allowed since
Pakistan (SECP); merged to form 1992
1999 State Life
Insurance Corp.2

30 31
 Table 6: Selected Economic, Demographic variables and Regulatory Restrictions
Popn GDP Per – Religion: Life Business Regulatory Restrictions
Year 2004 Growth Majority Price Investment Solvency
capita@
Rate# Popn Regulation Regulation Norms
Bangladesh 1.88 402.07 Muslim Not Known Stringent Weakly imposed
China P.R. 0.60 1323.14 Confucianism Approval from Strict restrictions, The solvency
CIRC confining the areas margin is a
of insurer investment function of
to bank deposits, insurer’s size of
Govt. bonds, financial business
bonds, etc. measured by
premiums,
claims, or both.

32
Hong Kong 1.16 27446.32 Confucianism Self-regulatory No specific guidelines. 4% of
mathematical
reserves and
0.3% of capital
at risk or $HK
2 million
India 1.43 538.31 Hindu Approval from Stringent Excess of the
IRDA Not less than 50% value of insurer
in approved Securities over its liability
amount value
Indonesia 1.35 906.19 Muslim Not Known Total invest. excluding 1% of
mortgage loans should Premium
be equal to technical Reserves
reserves

Popn GDP Per – Religion: Life Business Regulatory Restrictions

Year 2004 Growth Majority Price Investment Solvency
capita@
Rate# Popn Regulation Regulation Norms
Malaysia 1.86 4289.72 Muslim 1996 Insurance 30% in Bumiputra Actual valuation
Act & the Shares, ownership of liability,
Insurance share by ethnic Malay aggregate
Regulation has Insurance
provisions coverage, etc.
regarding
pricing
Pakistan 2.41 566.03 Muslim To follow Statutory fund for eachPrescribes asset
SECP product sold & liability valua-
Guidelines tion methods
33

Philippines 1.79 1084.92 Roman Approval from Partial/ varying Aggregate

Catholic the commission insurance
of the premium Coverage in force,
rates subject to min.
amount
Singapore 1.31 24163.91 Buddhist Approval from Partial/ varying Fund solvency
principal margin &
Officers and company
directors from solvency margin
Insurance Dept.
& certificate
from appointed
actuary
 Table 7: Results of Time Series Analysis

fund subject to
Total Liabilities
2% of reserve
Dependent Variable Insurance Penetration Insurance Density

sufficiently >
Solvency

min. amount
30% reserve funds in Total Assets
Norms
Independent Variables I II III IV

Life Business Regulatory Restrictions

Constant -0.145795 -0.079532 0.001854 0.00308
(0.1651) (0.1645) (0.0035) (0.0039)

Exist
GDP per-capita -0.553* -0.55249* 0.510123* 0.510788*
(0.2769) (0.2797) (0.2908) (0.2911)
GDS per-capita 0.528458* 0.499001 0.593214* 0.569971*

Separate for foreign

Investments to be
Financial Depth (0.3060) (0.3064) (0.3208) (0.3176)
Investment
Regulation

Govt. securities

within Thailand
Price / Cost of 0.429667* 0.43861* 0.406632* 0.422833*

and domestic
Insurance (0.0984) (0.1003) (0.0993) (0.1005)

companies
Inflation 0.005456 -0.097568 -0.302486 -0.233493
(0.6222) (0.6217) (0.6487) (0.6408)
Real Interest Rate -0.172807* 0.005457* 0.006023* 0.006005*

# Annual rate of growth in percentage; @ In USD at constant 2000

(0.0031) (0.0031) (0.0032) (0.0032)
Urbanization 0.052922* 0.053652* 0.048496* 0.053051*
(0.0409) (0.0290) (0.0275) (0.0288)
Regulation

Source: As in Table 5 and World Bank (2006) WDI CD-ROM 2006.

Young Dependency 4.909387 5.605282
Price

Ratio (6.0713) (5.9679)

required

required
Approval

Approval

Approval
required

Old Dependency Ratio -88.6631 -75.57763

(80.5820) (78.7703)
Crude Death Rate -0.006334 -0.00612
(0.0085) (0.0085)
Total Life Expectancy 0.036597 0.020392
Religion:
Majority

at Birth (0.0280) (0.0407)

Popn
Buddhist

Buddhist

Buddhist

Observations 38 38 38 38
F Test Statistics 6.64 6.45 6.12 6.11
R2 0.6470 0.6404 0.6281 0.6276
GDP Per –

Adj-R2 0.5496 0.5412 0.5255 0.5249

961.61

2355.99

501.99
capita@

D-W Statistics 2.7556 2.7350 2.7021 2.7229

* Statistically Significant at some % level of significance; values in parentheses
are standard errors.
Growth

0.86

0.87

1.04
Rate#
Popn
Year 2004

Sri Lanka

Thailand

Vietnam

prices;

34 35
 Figure 1: Insurance Penetration in Selected 12 Asian Economies Appendix 1: Explanatory and Explained variables

Insurance penetration in 12 Asian Economies Type of

Variable Name Description
8 Variable
Gross Domestic It is the sum of value added by all
Premiums as % of

Product (GDP) resident producers plus any product taxes

6 (less subsidies) not included in the
valuation of output. Growth is calculated
GDP

4 from constant price GDP data in local

currency unit
GDP per-capita It is gross domestic product divided by
2
midyear population.
GDS per-capita The gross domestic savings divided by
0 midyear population.
1994 Year 1999 2004 ECONOMIC Consumer Price It reflects changes in the cost to the
Index (CPI) average consumer of acquiring a basket
Bangladesh China Hong Kong India of goods and services that may be fixed
Indonesia Malaysia Pakistan Phillipines or may change at specified intervals,
Singapore SriLanka Thailand Vietnam such as yearly.
Liquid Liabilities as They include bank deposits of generally
Source: Swiss Re, Sigma (various Issues) a % of GDP (for less than one year plus currency. It is the
Financial Depth) sum of currency and deposits in the
(FIND) central bank, plus transferable deposits,
electronic currency, plus savings in time
and savings deposits, foreign currency
transferable deposits, certificate of
deposit and securities repurchase
agreements etc.
Inflation Rate (INFR) Log difference of CPI
Real Interest Rate
(RIR) Deposit interest minus inflation
Population Total mid-year population
Total Dependency The ratio of dependent young Population
Ratio (TDR) and dependent old Population to the
working age population-those ages 15 to
64
Young Dependency The ratio of dependents - people younger
Ratio (YDR) than 15 years of age to the working age
DEMOGRAPHIC population - those ages 15 to 64
Old Dependency Ratio The ratio of dependents - people older
(ODR) than 64 years of age to the working age
population - those ages 15 to 64
Adult Literacy Rate The percentage of people ages 15 and
(ADL) older who can, with understanding, both
read and write a short, simple statement
about their everyday life.

36 37
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