Beck and Webb 2003

Economic, Demographic, and Institutional Determinants of Life Insurance Consumption
across Countries
Author(s): Thorsten Beck and Ian Webb
Source: The World Bank Economic Review, Vol. 17, No. 1 (2003), pp. 51-88
Published by: Oxford University Press
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THE WORLD BANK ECONOMIC REVIEW, VOL. I7, NO. I 5I-88
Economic, Demographic, and Institutional

Determinants of Life Insurance
Consumption across Countries
Thorsten Beck and Ian Webb
Life insurance has become an increasingly important part of the financial sector over
the past 40 years, providing a range of financial services for consumers and becoming
a major source of investment in the capital market. But what drives the large variation
in life insurance consumption across countries remains unclear. Using a panel with data
aggregated at different frequencies for 68 economies in 1961-2000, this article finds
that economic indicators-such as inflation, income per capita, and banking sector
development-and religious and institutional indicators are the most robust predic-
tors of the use of life insurance. Education, life expectancy, the young dependency ratio,
and the size of the social security system appear to have no robust association with life
insurance consumption. The results highlight the importance of price stability and
banking sector development in fully realizing the savings and investment functions of
life insurance in an economy.
Life insurance companies play an increasingly important role in the financial

sector. In 1980-85 the total assets of life insurance companies accounted for only
11 percent of gross domestic product (GDP) for a sample of 13 countries for which
data are available, but in 1995-97 they accounted for 28 percent of GDP in the
same countries. This greater importance is also reflected in the business volume
of life insurers. While life insurance penetration-the ratio of premium volume
to GDP-was 1.2 percent in 1961-65 for a sample of 19 countries for which data
are available, it reached 4.2 percent in 1996-2000 in these countries.
This increased importance of life insurance as a provider of financial services
and of investment funds in capital markets is especially pronounced for devel-
oped economies, whereas life insurance consumption remains low in many de-
veloping economies. But even among developing countries there are striking
differences. The penetration ratio in South Africa was 12.7 percent in 1996-2000,
but it was less than 0.01 percent in the Syrian Arab Republic. The large varia-
Thorsten Beck is with the Development Research Group at the World Bank; his e-mail address is
tbeck@worldbank.org. Ian Webb is with the International Insurance Foundation; his e-mail address is
webb@iifdc.org. The authors are grateful to Robert Cull, Lisa Gardner, Harold Skipper Jr., partici-
pants in the Finance Forum at the World Bank in June 2002, three anonymous referees, and the editor
for useful comments and discussions. Any remaining errors are the authors'.
DOI: 10.1093/wber/lhgOll
C 2003 The International Bank for Reconstruction and Development / THE WORLD BANK
51
52 THE WORLD BANK ECONOMIC REVIEW, VOL. 17, NO. I
tion in the use of life insurance across countries raises que

this variation and thus what determines life insurance consumption.
Life insurance provides individuals and the economy with several important
financial services. First, life insurance products encourage long-term saving and
the reinvestment of substantial sums in public and private sector projects. By
leveraging their role as financial intermediaries, life insurers have become a key
source of long-term finance, encouraging the development of capital markets
(Catalan and others 2000; Impavido and Musalem 2000).1 Indeed, several stud-
ies have found evidence that the development of the insurance sector is related
to economic growth (Ward and Zurbruegg 2000; Webb 2000; Soo 1996). Sec-
ond, in the face of growing urbanization, population mobility, and formaliza-
tion of economic relationships between individuals, families, and communities,
life insurance has taken on increasing importance as a way for individuals and
families to manage income risk.
The importance of life insurance for economic and financial development
directs us to investigate which economic, demographic, and institutional factors
give rise to a vibrant life insurance market. Several studies have identified a core
set of socioeconomic determinants as good predictors of life insurance consump-
tion. But the relatively limited data samples and the different measures of con-
sumption used in these studies have limited their scope and made it difficult to
generalize from their conclusions.
In this article we improve on the existing literature in several ways. First, we
use a new data set that significantly extends the coverage of economies and pe-
riods. Previous cross-sectional and panel studies have been limited in depth or
in breadth.2 The new data set spans 68 economies over the period 1961-2000
and includes aggregate data at different frequencies.
Second, panel analysis allows us to exploit both cross-country and time-series
variation in life insurance consumption and its potential determinants. We can
thus better assess what has driven the rapid increase in life insurance consump-
tion over the past four decades. At the same time cross-sectional analysis allows
us to analyze the effect of time-invariant determinants and control for biases
induced by reverse causation and simultaneity.
Third, by using several alternative measures of life insurance consumption, we
provide additional depth and robustness to the results. Life insurance premiums
and life insurance in force-the outstanding face amounts plus dividend additions
of life insurance policies-measure different aspects of life insurance consumption.
Finally, we introduce a new measure for exploring the role of life insurance in
the economy-its relative weight in individual savings portfolios. This indicator
1. For more on the economic and social importance of life insurance, especially in developing coun-
tries, see UNCTAD (1982), one of the first studies in this area.
2. Browne and Kim (1993) use data for 45 countries for 1987, and Outreville (1996) data for 48
countries for 1986. Truett and Truett (1990) produce estimates for two countries, Mexico and the United
States, for 1960-82, and Beenstock and others (1986) estimates for 10 OECD countries for 1970-81.
Beck and Webb 53
measures the weight of life insurance premiums in the private savi

economy.
The results are expected to help policymakers understand what drives the
supply of and demand for life insurance. They may also help design strategies
for developing nascent life insurance markets and extending their benefits to more
countries.
I. MEASURING LIFE INSURANCE CONSUMPTION ACROSS COUNTRIES
Life insurance policies are financial products that offer two main services: in
come replacement for premature death and a long-term savings instrument. T
are a multitude of types of policies, each offering the consumer different c
age options and investment choices, but they can be broken down into two
eral categories: those offering mortality coverage only and those combinin
mortality coverage with a savings component. Policies in the first category a
generally referred to in the United States and many other countries as term
cies. Those in the second category are known as whole life, universal life, var
able life, endowment, and by a variety of other names. Policies in the second
category typically earn interest, which is returned to the consumer through policy
dividends, cash values on termination of the policy, or endowment sums on
maturation of the policy. These policies incorporate varying amounts of mor-
tality coverage while generally offering a substantial savings component.
In addition to these two categories, life insurers also sell annuity policies.
Annuities are contractual arrangements whereby in return for a lump sum or
periodic payments until annuitization, the insurer promises to make periodic
payments to the insured, often until his or her death. Insurers providing annu-
ities thus undertake risks associated with longevity of the insured.
Because the different measures of life insurance consumption used in our
empirical analysis aggregate both categories of life insurance policies as well as
annuity policies, we cannot distinguish between the demand for and supply of
mortality risk coverage, longevity risk coverage, and savings through life insur-
ance. This aggregation in the data produces a bias against finding significant
relationships (see Browne and Kim 1993, note 1). Significant relationships be-
tween the variables hypothesized to affect insurance consumption and the amount
consumed are therefore likely to signal added robustness in the results.
Life insurance penetration, defined as the ratio of premium volume to GDP,
measures insurance activity relative to the size of the economy. Because it is the
product of quantity and price, it is not a perfect measure of consumption. A larger
premium volume might reflect a larger quantity, a higher price, or a difference
in the mix of mortality risk, savings, and annuity elements purchased. Lack of
competition and costly regulation might increase the amount spent on insurance
by raising its price, without implying higher insurance consumption.
Life insurance density, our second indicator of life insurance consumption, is
defined as premiums per capita. This measure shows how much each inhabitant
54 THE WORLD BANK ECONOMIC REVIEW, VOL. I7, NO. I
of a country spends on insurance on average, expressed in constant dollars.3

Although both life insurance penetration and life insurance density use gross
premiums, important differences remain between the two measures: life insur-
ance penetration measures life insurance consumption relative to the size of the
economy, whereas life insurance density compares life insurance consumption
across countries without adjusting for income. Consumers who purchase life
insurance policies to insure their dependents against mortality risk will poten-
tially buy more coverage and thus a higher face value in richer countries, be-
cause the death benefit has to replace a larger income. We therefore expect life
insurance density to be more income elastic than life insurance penetration.
Because life insurance policies are just as much a savings product as they are
an insurance product, we can relate the total premiums to private savings rather
than income. This implies a portfolio rather than an income approach, treating
life insurance policies as one of several assets from which investors can choose.
We therefore construct the measure life insurance in private savings, equal to
total premiums divided by private savings, to indicate the share of private sav-
ings that the inhabitants of a country invest in life insurance policies.4 Because
of data limitations, this indicator is available only for 1970-95.
Our last measure of life insurance consumption is life insurance in force to
GDP, equal to the sum of the face amounts plus dividend additions of life insur-
ance policies outstanding as a share of GDP. It is a measure of mortality risk
underwritten plus savings accumulated. Life insurance in force thus includes both
the cash value of policies, associated with the savings component of life insur-
ance policies, and the net amount of risk faced by life insurers. Unlike the other
three indicators, life insurance in force to GDP does not include price and so
measures only quantity. As a result of data limitations, this indicator is avail-
able only for 1961-94.
The mortality risk, savings, and annuity components have different weights
in the premium and stock measures. For a given structure of the insurance mar-
3. We also calculate an alternative measure of life insurance density using international real dollars.
Specifically, rather than applying exchange rates, the local currency premiums are multiplied by the
purchasing power parity (Ppp) conversion factor, defined as the number of units of a country's cur-
rency required to buy the same amount of goods and services in the domestic market as one U.S. dollar
would buy in the United States. Using Ppp conversion factors is preferable to using exchange rates,
because exchange rates are distorted by differences in exchange rate regimes. Moreover, Ppp conversion
factors take into account the fact that the price of nontraded goods relative to traded goods increases with
the income level of an economy. Because the death benefit of life insurance policies has to cover the typi-
cal household spending on both traded and nontraded goods, using exchange rates biases the insurance
density of developing economies downward. But because data on the Ppp conversion factor are available
only for 1975-2000, the insurance densities in international real dollars are constrained to this period.
All the regressions were run using this alternative indicator of life insurance density without significant
differences, so we report only results with the general measure available over a longer period.
4. According to the United Nations System of National Accounts, life insurance premiums that imply
claims of policyholders on insurance companies' technical reserves are treated as savings, whereas in-
surers' costs and profits are part of consumption. See United Nations Statistics Division (1993).
Beck and Webb 55
ket, the mortality risk component, as measured by the net amount

stronger weight in life insurance in force to GDP than in the other three mea-
sures. In most (but not all) countries life insurance in force does not include
annuities (see Browne and Kim 1993).
Life insurance consumption varies widely across economies. While Syrians
spent less than US$1 a year on life insurance services in 1996-2000, Japanese
spent more than US$3200. Ecuadorians invested less than 1 percent of their total
savings in life insurance policies in 1991-95, and British citizens invested more
than 40 percent in 1986-90. Similarly, life insurance in force was less than 0.1
percent of GDP for Greece in 1976-80, but it reached nearly 400 percent of GDP
for Japan in 1991-95. There are large correlations between all three measures
of life insurance consumption that are significant at the 1 percent level (tables 1
and 2).
II. DETERMINANTS OF LIFE INSURANCE CONSUMPTION
In this section we describe the theoretical underpinnings of our empirical tests

and different factors hypothesized to drive the demand for and supply of life
insurance policies.5
Theoretical Underpinnings
Yaari (1965) and Hakansson (1969) were the first to develop a theoretical frame-
work to explain the demand for life insurance. In this framework the demand
for life insurance is attributed to a person's desire to bequeath funds to depen-
dents and provide income for retirement. The consumer maximizes lifetime util-
ity subject to a vector of interest rates and a vector of prices, including insurance
premium rates. This framework posits that the demand for life insurance is a
function of wealth, expected income over a person's lifetime, interest rates, the
cost of life insurance policies (administrative costs), and the assumed subjective
discount rate for current over future consumption.
Lewis (1989) extends this framework by explicitly incorporating the prefer-
ences of the dependents and beneficiaries into the model. Specifically, he derives
the demand for life insurance as a maximization problem of the beneficiaries,
the spouse, and the offspring of the policyholder. Deriving utility maximization
by the spouse and offspring separately and assuming no bequest by the policy-
holder and an isoelastic utility function, Lewis shows that total life insurance
demand can be written as
(1) (1 - lp)F = max([(1 - lp) /1(1 - p)]118TC - W,0}
where / is the policy loading factor (the ratio of the cost of the insurance
actuarial value), p the probability of the primary wage earner's death, F the face
5. For an excellent overview of the potential determinants of the demand for and supply of life in-
surance products, see Skipper and Black (2000, chap. 3).
TABLE 1. Descriptive Statistics
Variable Mean Median SD Maximum Minimum Observations
Life insurance penetration 1.69 1.03 1.97 12.69 0.00 322

Life insurance density 264.51 68.88 442.45 3275.39 0.14 322
Life insurance in 7.64 4.64 8.24 44.90 0.00 203
private savings
Life insurance in force 56.25 29.85 60.69 398.43 0.09 216
to GDP
GDP per capita 9463 4393 10,090 45,061 193 451
Young dependency ratio 55.14 50.64 23.02 107.26 21.41 451
Old dependency ratio 12.52 9.64 6.44 27.65 4.50 451
Life expectancy 68.17 70.71 8.07 80.48 41.63 451
Schooling 5.76 5.60 2.72 12.18 0.63 451
Inflation rate 14.37 7.32 25.63 222.33 -0.10 451
Banking sector development 47.29 38.62 32.65 180.88 5.41 451
Gini index 37.41 34.89 9.61 61.88 20.46 221
Urbanization 60.26 61.00 21.63 100.00 8.11 451
Social security 12.13 9.57 8.98 38.26 0.46 343
Real interest rate 26.44 1.80 260.74 3686.98 -46.13 402
Expected inflation rate 14.31 7.41 25.52 232.85 -0.03 451
Permanent income 9450 4329 10,172 51,429 176 451
Secondary enrollment 67.71 69.51 29.58 152.84 7.67 399
Private savings rate 20.54 20.95 5.93 37.45 2.81 264
Revolutions and coups 0.17 0.00 0.34 2.60 0.00 312
Human development index 0.75 0.77 0.13 0.93 0.35 304
Rule of law 4.13 4.00 1.53 6.00 1.00 245
Inflation volatility 6.94 2.79 16.50 169.73 0.21 451
Institutional development 0.48 0.54 0.78 -1.33 1.72 69
Catholic 41.04 29.80 40.03 0 96.9 69
Muslim 13.12 0.55 29.28 0 99.4 69
Protestant 14.64 2.60 25.26 0 97.8 69
British legal origin 0.26 0.00 0.44 0 1 69
French legal origin 0.45 0.00 0.50 0 1 69
Socialist legal origin 0.12 0.00 0.32 0 1 69
German legal origin 0.09 0.00 0.28 0 1 69
Scandinavian legal origin 0.07 0.00 0.26 0 1 69
Good crops 1.15 1.06 0.32 0.65 2.44 65
Source: Appendix table A-1.
value of all life insurance written on the primary wage earner's life, 8 a measure
of the beneficiaries' relative risk aversion, TC the present value of consumption
of each offspring until he or she leaves the household and of the spouse over his
or her predicted remaining life span, and W the household's net wealth. Demand
for life insurance increases with the probability of the primary wage earner's
death, the present value of the beneficiaries' consumption, and the degree of risk
aversion. It decreases with the policy loading factor and the household's wealth.
But life insurance consumption is not driven only by consumer demand. Im-
portant supply-side factors affect the availability and price of life insurance. In-
surance companies need human and information resources to effectively measure
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the pricing and reserve requirements for products as

opportunities in financial markets. Adequate protection of property rights and
effective enforcement of contracts also facilitate the investment function of life
insurers. These supply factors are expected to affect the costs of life insurance
products and might therefore be represented by the policy loading factor in the
Lewis model.
Attempts have been made to model the relationship between the supply of
and demand for life insurance separately, but data limitations have restricted
empirical testing of the models (see Beenstock and others 1986). The available
data do not allow us to distinguish between supply and demand. Moreover,
premium data do not allow us to observe the actual amount of insurance cover-
age purchased, as they are a combined measure of price and coverage. Unless
the price is constant across countries, which is unlikely, assuming that the pre-
mium is equivalent to the amount of coverage would introduce a source of noise
in our estimations. But using the variable often employed to proxy price (premi-
ums over life insurance in force) requires a troublesome assumption-that the
mix of policies remains constant across countries and over time.6
Price is undoubtedly an important determinant of the consumption of life
insurance, however, and leaving it out may subject the empirical testing to omit-
ted variable bias. We address this problem in two ways. First, we assume that
the price is a function of several supply-side factors. Varying levels of urbaniza-
tion, monetary stability, institutional development, political stability, and banking
sector development all affect insurers' ability to provide cost-effective insurance.
Second, we use panel estimation techniques that eliminate biases due to omitted
variables, such as the price variable in our model.
In the following sections we describe variables that may be linked to the de-
mand function described by Lewis (1989) as well as several supply factors that
might proxy for the policy loading factor. While the Lewis model focuses on the
mortality risk component of life insurance policies, we link the different deter-
minants to the savings and annuity components of life insurance policies as well.
The portfolio approach underlying life insurance in private savings adds another
dimension to the discussion.
Demographic Determinants
A higher young dependency ratio (the ratio of young dependents to the working-
age population) is assumed to increase the demand for mortality coverage and
decrease the demand for savings through life insurance and annuities (table 3;
see table A-1 for the construction and sources of the variables). A larger share of
dependents in the population means a higher total present value of consump-
tion of the beneficiaries of those insured-and therefore a higher demand for
life insurance that provides dependents with payments in the event of the pre-
6. Browne and Kim (1993) use such a price variable, but they note the bias introduced by different
compositions of the overall insurance portfolio across countries.
Beck and Webb 59
TABLE 3. Determinants of Life Insurance Consumption across Countr

Expected Results of the Regression Analysis
Expected
Expected effect Expected effect Expected effect effect on all
on savings on mortality on annuity components
Variable component risk component component combined
Demographic variables
Young dependency ratio - + - Ambiguous
Old dependency ratio + - + Ambiguous
Life expectancy + - + Ambiguous
Schooling + + + +
Religion (Muslim)
Urbanization + + + +
Economic variables
Income + + + +
Private savings rate Ambiguous No effect Ambiguous Ambiguous
Inflation rate
Inflation volatility
Real interest rate + + + +
Banking sector development + + + +
Social security
Gini index Ambiguous Ambiguous Ambiguous Ambiguous
Institutional variables
Rule of law + + + +
Revolutions and coups
Institutional development + + + +
Note: This table assumes the division of

and annuity components.
Source: See section on determinants of
mature death of the primary w

equation 1). A high young depen
population is too young to consi
demand for savings through life
Browne and Kim (1993), and Tru
pendency ratio is positively corr
opposite effects of the young d
components of life insurance, h
dency ratio is ambiguously corr
A higher old dependency ratio
age population) is assumed to in
components and decrease the de
insurance. We conjecture that in
lation is retired, savings throug
outliving one's retirement incom
the risk of the primary wage e
of the old dependency ratio is t
Societies with a longer life expectancy should have lower m

costs, lower perceived need for mortality coverage, but high
life insurance vehicles and more demand for annuities (a long
would be reflected by a lower p in equation 1). This would im
correlation with the demand for life insurance products (com
others 1986). Earlier studies have found life expectancy to be
lated with life insurance penetration (Beenstock and other
1996).
We expect that a higher level of education in a population will be positively
correlated with the demand for any type of life insurance product. A higher level
of education may increase people's ability to understand the benefits of risk
management and long-term savings-and therefore increase their risk aversion
(this would be reflected by a lower 8 in equation 1).7 Education may also in-
crease the demand for pure death protection by lengthening the period of de-
pendency as well as by increasing the human capital of-and so the value to be
protected in-the primary wage earner (this would be reflected by a higher TC
in equation 1). But a positive relationship between education and life insurance
might also indicate that better access to long-term savings and insurance instru-
ments encourages access to higher education.8 Truett and Truett (1990) and
Browne and Kim (1993) find a positive relationship between life insurance con-
sumption and the level of education. To measure the education level, we use the
average years of schooling in the population over age 25 and the gross second-
ary enrollment ratio.
The religious inclination of a population may affect its risk aversion and its
attitude toward the institutional arrangements of insurance (this would be re-
flected by cross-country variation in 6 in equation 1). Religious opposition to
life insurance, though stronger in European countries before the 19th century,
persists in several Islamic countries today (see Zelizer 1979 for a discussion of
the role of religion in creating cultural opposition to life insurance). Followers
of Islam have traditionally disapproved of life insurance because it is considered
a hedge against the will of Allah.9 Unsurprisingly, Browne and Kim (1993) and
Meng (1994) find a dummy variable for Islamic countries to be negatively cor-
related with demand for life insurance. Here we use a broader measure of reli-
gious inclination by including Protestantism, Catholicism, and a composite of
other religions, defined as the ratio of the adherents of a religion to the entire
population. While we expect the share of the population that is Muslim to be
7. However, as pointed out by Browne and others (2000), citing unpublished work by Franqois
Outreville and George Szpiro, risk aversion might also be negatively correlated with education.
8. We are grateful to one of the referees for pointing this out. A similar debate on the role of educa-
tion has taken place in the empirical growth literature; see Bils and Klenow (2000).
9. The advent of takaful insurance-approved by Islamic scholars and licensed and marketed in
countries with Muslim populations-in the past decade, however, has increased the acceptance of life
insurance in some Islamic populations. For further information see www.insurance.com.my/zone_takaful/
introduction.htm.
Beck and Webb 61
negatively related to demand for life insurance, we do not have prior

tions about the signs on the other religion variables.
Economies with greater urbanization (a larger share of urban population in
the total) are expected to have higher life insurance consumption. The concen-
tration of consumers in a geographic area simplifies the distribution of life in-
surance products because it reduces the costs related to marketing, premium
collection, underwriting, and claims handling. A larger share of urban popula-
tion is also correlated with less reliance on informal insurance agreements and
therefore may induce higher demand for formal insurance products.
Economic Determinants
Life insurance consumption should rise with income for several reasons. First,
person's consumption and human capital typically increase along with income,
creating a greater demand for insurance (mortality coverage) to safeguard th
income potential of the insured and the expected consumption of his or her de-
pendents (this would be reflected by a higher TC in equation 1). Second, life
insurance may be a luxury good, since increasing income may enable people to
direct a larger share of their income to retirement and investment-related life
insurance products. Finally, the overhead costs associated with administering
and marketing insurance can make larger policies less expensive per dollar of
insurance in force, lowering their price. Using both aggregate national accounts
data and individual household data, several studies have shown that the use of
life insurance is positively related to income (Campbell 1980; Lewis 1989;
Beenstock and others 1986; Truett and Truett 1990; Browne and Kim 1993;
Outreville 1996). We use real GDP per capita as well as an indicator of perma-
nent income, calculated as the predicted value from a regression of the log of
each country's real GDP per capita on a time trend. Insurance against mortality
risk and consumption and savings decisions are related to permanent income or
income over the life cycle rather than current income.
Theory suggests an ambiguous relationship between life insurance and an
economy's private savings rate. If private agents save a larger share of their in-
come, they might or might not be willing to increase their savings in life insur-
ance policies. We use the share of private savings in gross national disposable
income.
We expect inflation and its volatility to have a negative relationship with life
insurance consumption. Because life insurance savings products typically pro-
vide monetary benefits over the long term, monetary uncertainty has a substan-
tial negative effect on the expected returns on these products. Inflation can also
have a disruptive effect on the life insurance industry when interest rate cycles
spur disintermediation.10 These dynamics make inflation an additional encum-
brance on the product pricing decisions of life insurers, possibly reducing sup-
10. Fixed interest rates and loan options embedded in some life insurance policies, for example,
spurred disintermediation in the U.S. life insurance market during the inflationary 1970s and 1980s.
ply in times of high inflation (see Cargill and Troxel 1979 for
possible effects of inflation on the life insurance market). In
for a relationship between life insurance consumption and the
its standard deviation, we also test for a relationship with the
defined as the difference between the nominal interest rate a
predicts a positive relationship: a higher real interest rate incr
investment returns and thus their profitability, in turn offe
ability of financial relative to real investments for potential
insurance policies.
We expect banking sector development to be positively cor
insurance consumption.1" Well-functioning banks may increa
of consumers in other financial institutions, such as life insur
vide life insurers with an efficient payment system. Efficient
entire financial system-as might be reflected in the absence o
ings and other distortionary policies-is thought to help life in
efficiently. But a vibrant insurance sector might also foster the d
banking sector, so a positive relationship between the two var
sarily be interpreted as evidence of causality. Outreville (1996)
positive relationship between financial development and life
tion. We use the total claims of deposit money banks on dom
sectors as a share of GDP as an indicator of banking sector d
We expect the size of a country's social security system to
related with the demand for life insurance products. Kim (198
postulate that social security displaces private insurance. If g
savings are being channeled through the government, or if th
vides substantial benefits to families of prematurely deceased
should be less demand for life insurance products (this would
higher Win equation 1). We use public expenditures on social se
as a share of GDP as an indicator of the size of the social secu
The correlation of a country's income distribution (as meas
index) with life insurance consumption is expected to be amb
and others (1986) reason that wealthy population groups do n
protection, whereas poorer groups have limited demand becau
straints. (Both the possibility of declining risk aversion with g
the replacement of life insurance coverage with surplus asset
portfolio are expected to reduce the demand for life ins
wealthy.) A more equal income distribution with a larger
therefore result in greater demand for life insurance. But al
class may have the greatest demand for life insurance saving
may be a minimum level of income at which these policies be
Accordingly, in a poor country with a large middle class, few
11. Outreville (1992) also proposes a relationship between financial devel

markets.
Beck and Webb 63
able to purchase life insurance than in a poor country with a less eq

tion and a larger or wealthier upper class. The relationship between
tribution and life insurance consumption is thus ambiguous. Beenstoc
(1986) find a negative relationship between the Gini index and life insurance
penetration.
We also test for a relationship between life insurance consumption and the
human development index, as constructed by the United Nations Development
Programme (UNDP). This index measures the relative achievements of a coun-
try in life expectancy, education (both literacy and gross enrollment), and in-
come (GDP per capita), averaged over the three areas. Values are bounded
between zero and one. Because we expect an ambiguous relationship between
life expectancy and life insurance consumption, we do not necessarily expect a
robust relationship between the human development index and our measures
of life insurance consumption. Outreville (1996) finds no significant relation-
ship between the human development index and life insurance consumption,
and Outreville (1999) shows that the index is positively correlated with mea-
sures of financial development.
Institutional Determinants
A vibrant life insurance market depends to a large extent on the institutional

framework and political stability of a country. If fraud is common in claims re-
porting, insurance becomes prohibitively costly for a large part of the popula-
tion. An inability to appeal the breach of life insurance contracts by insurers
reduces the value of such contracts to consumers and may deter them from com-
mitting large sums of money to these products. Lack of property protection and
contract enforcement hampers life insurers' ability to invest efficiently and con-
trol the price of their products. Finally, lack of political stability shortens the
economic horizon of both potential buyers and suppliers of life insurance prod-
ucts, dampening the development of a healthy life insurance market.
To measure these institutional and political factors, we use three different
indicators. Rule of law measures the degree to which citizens of a country are
able to use the legal system to mediate disputes and enforce contracts. The aver-
age number of revolutions and coups a year indicates the political stability of a
country. Institutional development is an average of six indicators measuring voice
and accountability, political stability, government effectiveness, regulatory qual-
ity, rule of law, and control of corruption. While data for rule of law are avail-
able for 1982-2000 and data for revolutions and coups for 1961-90, data for
institutional development are available for only one point in time, 1998. We there-
fore use this indicator only in the cross-country estimations.
Descriptive Statistics and Correlations
As can be seen in table 1, there is a large variation in the economic and financial
development of countries, their demographic structure, and their macroeconomic
performance. Most of the explanatory variables are correlated with life insur-
ance consumption at the 1 percent level, with the notable ex

interest rate and revolutions and coups (table 2, and appendix
A-3). But not all the correlations confirm the theoretical pre
with a smaller share of young population and a larger share
have higher life insurance consumption, as do those with a lon
Life insurance consumption is also higher for countries in which g
more on transfers and other subsidies and in which income d
equal.
Many of the potential determinants of life insurance consumption are highly
correlated with one another. Richer countries have older populations, longer
life expectancies, higher levels of schooling, lower inflation, and better devel-
oped banking systems. Countries with higher young dependency ratios have
lower old dependency ratios, shorter life expectancies, and lower levels of edu-
cation. The high correlations between the explanatory variables underscore the
importance of performing multivariate regression analysis as well as the need
to control for country-specific effects that might drive several or all of these
explanatory variables.
III. EMPIRICAL RESULTS
Because of the significant correlations between many of the possible det

nants of life insurance consumption, we conduct multivariate regression
to assess which determinants robustly predict life insurance consumptio
after we control for other potential effects. The baseline regression
real GDP per capita, young and old dependency ratios, average years of s
ing, life expectancy, the inflation rate, and banking sector development.1
quent regressions include a larger set of potential determinants of life in
consumption.
Panel Analysis, 1961-2000
Our main results are based on an unbalanced panel of 68 economies, with da

averaged over eight five-year periods (appendix table A-4).13 Using a panel a
lows us to exploit both cross-country and time-series variation in the data a
to control for differences across countries and over time not accounted for
any of the explanatory variables.14 We therefore control for both fixed coun
12. We include the dependent and several independent variables in logs so that the coefficient
be interpreted as elasticities.
13. The number of economies varies across the life insurance measures, and the samples do not ov
completely.
14. These explanatory variables can be variables that are not included in our estimation beca
they do not vary over time or other underlying country characteristics that are not captured in an
our variables. Among these omitted variables might be the regulation of the insurance sector, taxat
and the price variable, for which we use proxy variables (such as the supply determinants describ
the section on theoretical underpinnings), but we do not have any direct measures.
Beck and Webb 65
and time-specific effects in our regression and estimate the regres

ther a fixed or random effects model.15 We average data over five y
several of our explanatory variables are available only at a five-year
and others might be subject to short-term fluctuations related to th
cycle.16
The results in table 4 show that the variation in life insurance penetration across
countries can be explained by variation in income, the old dependency ratio,
inflation, and banking sector development. These four variables show signifi-
cant coefficients in our baseline regression and in most of our robustness tests.
Schooling, life expectancy, and the young dependency ratio are not robust pre-
dictors of life insurance consumption.
The results of our baseline regression indicate that a 10 percent increase in
real income per capita increases life insurance penetration by 5.7 percent, con-
firming that life insurance is a luxury good (column 1 of table 4). When we in-
clude the private savings rate and revolutions and coups, however, the coefficient
on income turns insignificant, a result of the smaller sample when either of the
two variables is included.17 When we replace GDP per capita with permanent
income, the results are confirmed (column 9 of table 4).
We find a positive relationship between the old dependency ratio and life in-
surance penetration. The size of the coefficient indicates that a 10 percent in-
crease in the ratio of the old population to the working-age population increases
life insurance penetration by 12 percent. This suggests that demand for savings
and annuity products increases as the population ages.
Price stability is an important predictor of life insurance consumption. The
coefficient on the inflation rate is significantly negative in all specifications. The
effect of a stable macroeconomic environment is also large. If Brazil, which had
one of the highest five-year average inflation rates in our sample, had achieved
an average inflation rate in 1991-95 of 7 percent (the sample median) rather
than the actual 212 percent, life insurance penetration might have been 0.87
percent of GDP rather than 0.29 percent.18 Replacing the inflation rate with the
expected inflation rate-the average of the inflation rate in the current and fol-
15. We test for the appropriateness of the fixed- or random-effects model with the Hausman test.
Under the null hypothesis that random and fixed effects estimates are not statistically different, both
estimators are consistent, but the fixed-effects model is inefficient. Under the alternative hypothesis that
both estimates are statistically different, only the fixed-effects model gives consistent coefficients. We
use the fixed-effects model when the null hypothesis is rejected at the 10 percent level and the random-
effects model otherwise.
16. Average years of schooling are available only at a five-year frequency, and life expectancy, the
urban population share, and the Gini index are not available on a yearly frequency for most countries.
Moreover, the inflation rate and banking sector development might be subject to short-term fluctua-
tions related to the business cycle.
17. We rerun the regressions without the private savings rate or revolutions and coups but restrict-
ing the sample accordingly. In neither case does income per capita enter significantly.
18. This result matches the finding by Babbel (1981) that even the demand for inflation-indexed life
insurance policies decreases during inflationary periods in Brazil.
TABLE 4. Determinants of Life Insurance Penetration in a Panel, 1961-2000:
Full Sample, Fixed Effects
Variable (1) (2) (3) (4) (5) (6)
Constant -7.069 -8.372 -6.073 -5.662 -8.011 -7.133

(1.92)* (2.07)** (.086) (1.47) (1.06) (1.94)*
GDP per capita 0.567 0.552 0.770 0.424 0.180 0.580
(2.89)*** (2.80) * * * (2.82) * * * (2.00) * * (0.69) (2.96) * * *
Young dependency -0.357 -0.326 -0.369 -0.964 -0.079 -0.354
ratio (1.12) (1.02) (1.01) (2.73)*** (0.22) (1.11)
Old dependency 1.196 1.195 0.920 1.105 1.308 1.192
ratio (3.90) * * * (3.89)*** (2.43)* * (2.75) * * * (3.82) * * * (3.89)***
Life expectancy -0.168 -0.091 -0.900 0.356 0.415 -0.178
(0.22) (0.12) (0.52) (0.46) (0.22) (0.23)
Schooling -0.048 -0.129 0.586 0.194 0.043 -0.054
(0.23) (0.55) (1.85)* (0.87) (0.14) (0.26)
Inflation rate -1.028 -1.038 -1.396 -1.058 -0.827
(5.18)*** (5.22)*** (4.70)*** (5.50)*** (3.37)***
Banking sector 0.352 0.353 0.438 0.227 0.422 0.353
Development (4.62)** (4.62)*** (4.70) *** (2.80)**$ (5.11)*** (4.64)***
Urbanization 0.277
(0.78)
Gini index 0.002
(0.17)
Social security 0.051
(0.50)
Revolutions and -0.065
coups (0.56)
Expected inflation -1.025
rate (5.22)***
Inflation volatili
Real interest rate
Permanent income
Secondary enrollment
Human development
index
Rule of law
Private savings rate
F-test time dummies 2.67** 2.59** 3.23*** 1.31 3.95*** 2.75***

Observations 322 322 177 277 190 322
Economies 66 66 58 61 53 66
Period 1961-2000 1961-2000 1961-2000 1966-2000 1961-90 1961-2000
R2 within 0.6627 0.6635 0.7275 0.6808 0.6387 0.6631
R2 between 0.3234 0.3086 0.4014 0.2889 0.2414 0.3234
R2 overall 0.3827 0.3679 0.5074 0.349 0.3372 0.3822
Hausman test 0.001 0.001 0.001 0.001 0.001 0.001
(p-value)
*Significant at the 10 percent level.

"Significant at the 5 percent level.
**Significant at the 1 percent level.
Note: The numbers in parentheses are t-statistics.
aDeveloping economies, random effects
Source: Authors' calculations.
(7) (8) (9) (10) (11) (12) (13) (14)a
-6.839 -4.578 -9.357 -7.895 -5.136 -7.085 -3.715 -2.380
(1.86)* (1.25) (2.44)** (2.00)** (1.89)* (1.38) (0.64) (0.41)
0.503 0.699 0.668 0.795 -0.017 0.375
(2.50)** (3.54)*** (3.24)*** (2.73)*** (0.08) (1.72)$
-0.405 -0.518 -0.270 -0.465 -0.681 -0.565 -0.930 -0.042
(1.27) (1.59) (0.84) (1.36) (1.65) (1.04) (2.47)* * (0.06)
1.159 1.230 1.076 1.238 1.757 1.471 1.302 0.226
(3.77)*** (3.61)*** (3.42)*** (3.65)*** (3.96)*** (2.23)** (3.24)*** (0.40)
-0.098 -0.779 -0.069 -0.115 -0.470 0.212 -0.963
(0.13) (1.01) (0.09) (0.15) (0.51) (0.16) (0.94)
-0.029 -0.221 -0.097 -0.294 0.420 -0.075
(0.14) (1.04) (0.47) (0.88) (1.64) (0.23)
-0.806 -1.659 -1.060 -1.047 -1.049 -0.984 -1.138 -1.187
(3.15) ** (5.79)*** (5.36)*** (5.26)* ** (4.85)*** (4.27)*** (4.98)*** (4.28)***
0.354 0.331 0.349 0.332 0.344 0.268 0.368 0.598
(4.65)*** (4.14)*** (4.62)*** (4.09)*** (3.76)*** (2.38)** (4.69)*** (3.76)***
-0.056
(1.37)
0.302
(2.78)***
0.792
(3.28)***
-0.029
(0.14)
2.423
(1.51)
-0.001
(0.02)
0.359
(2.56)**
1.89* 2.45** 2.02* 1.76 0.46 1.12 3.39** 4.02

322 304 322 298 266 224 205 141
66 64 66 65 65 66 57 37
1961-2000 1961-2000 1961-2000 1961-2000 1976-2000 1981-2000 1971-95 1961-2000
0.6653 0.6895 0.6659 0.6573 0.6073 0.5723 0.7189 0.4856
0.3266 0.3235 0.3328 0.3252 0.3 0.3749 0.3791 0.1219
0.3876 0.366 0.3834 0.3889 0.3428 0.3695 0.3957 0.1777
0.001 0.001 0.001 0.001 0.058 0.001 0.001 0.444
lowing year-confirms the results (column 6 of table 4).19 Infl

not explain any variation in life insurance penetration across
the real interest rate is positively related to life insurance pen
flation is controlled for (columns 7 and 8 of table 4).
Banking sector development is positively correlated with li
etration. The coefficient on the indicator of banking sector
nificantly positive in all specifications. As discussed, the posit
not imply a causal effect on life insurance penetration. Instead, it shows that
countries that have well-developed banks also have higher life insurance con-
sumption. In our cross-country analysis we try to control for reverse causation
and simultaneity bias.
Variation in the share of young population or in life expectancy cannot ex-
plain the variation in life insurance penetration across countries, confirming the
hypothesis of offsetting effects of the young dependency ratio (life expectancy)
on gross premiums, a positive (negative) effect on mortality risk, and a negative
(positive) effect on the savings and annuity components.20 Neither average years
of schooling nor secondary enrollment enter significantly at the 5 percent level
in any of the regressions.
Turning to our additional explanatory variables, we find a positive relation-
ship between the private savings rate and life insurance penetration. Urbaniza-
tion (column 2 of table 4), the Gini index (column 3), social security (column 4),
revolutions and coups (column 5), the human development index (column 11),
and rule of law (column 12) cannot explain the cross-country variation in life
insurance penetration.21 In the baseline regression with the sample limited to
developing economies, only inflation and banking sector development continue
to enter significantly at the 1 percent level, whereas income per capita enters
significantly and positively at the 10 percent level (column 14 of table 4). The
old dependency ratio cannot explain the variation in life insurance penetration
across developing economies.
Table 5 presents results with the other indicators of life insurance consump-
tion across countries as dependent variables. For each indicator it gives results
for two baseline regressions, one for the full sample and one restricted to de-
veloping economies. Life insurance density increases with higher income per
capita, a higher old dependency ratio, a lower inflation rate, and better devel-
oped banks (column 1 of table 5). Once we restrict the sample to developing
19. Following Browne and Kim (1993), we also use the average of inflation in the current and pre-
vious year, because consumers' inflation expectations might be determined by previous inflation expe-
rience. The results do not change.
20. Because the young and old dependency ratios and life expectancy are highly correlated with one
another, this result might be driven by multicollinearity. We therefore test the robustness of the results
by including only one of the three variables at a time. The results do not change.
21. We also try two alternative indicators of institutional development, corruption and bureaucratic
quality (like rule of law, these indicators come from the Political Risk Services (various years) Interna-
tional Country Risk Guide. Neither enters significantly in the regressions.
Beck and Webb 69
economies, however, only banking sector development enters signific

income elasticity of life insurance density is higher than that of life i
penetration, as expected (see the discussion in the section on measuring life
insurance consumption).
Life insurance in private savings increases with a higher old dependency ratio,
lower inflation, and better developed banks (column 3 of table 5). Interestingly,
the share of savings in life insurance policies decreases with a higher savings rate
Considering this result jointly with the positive coefficient (0.359) on the sav-
ings rate in the regression of life insurance penetration (column 13 of table 4)
suggests that although private agents invest some of their additional savings in
life insurance policies, overall there is a shift in their portfolios away from life
insurance policies toward other savings instruments. GDP per capita does not
explain the share of savings in life insurance policies. In the sample of develop-
ing economies only banking sector development (positively) and the private sav-
ings rate (negatively) can explain the variation in the share of private savings in
life insurance policies across developing economies.
Life insurance in force to GDP increases with higher income per capita, lower
inflation, a lower old dependency ratio, and better developed banks. While the
results for GDP per capita, inflation, and banking sector development confirm
the results using life insurance penetration and life insurance density, the results
for the old dependency ratio are surprising. The stronger weight of the mortal-
ity risk component in life insurance in force to GDP compared with that in the
other three measures, and its exclusion of annuities, might explain the opposite
sign.22 Only the results for income per capita and inflation are confirmed in the
sample restricted to developing economies.
Annual Panel, 1961-2000
Table 6 presents results for a panel of annual observations. Using annual ra

than five-year averages allows us to maximize the information we have and
test the sensitivity of our panel analysis to the frequency of the data.23 As i
five-year panel, life insurance penetration increases with income per capita,
old dependency ratio, and banking sector development and decreases with i
flation. Interestingly, we also find a negative relationship between the youn
dependency ratio and life insurance penetration, suggesting that countries w
a larger share of young population have lower life insurance consumption.2
in the five-year panel, expected inflation has a negative relationship with lif
insurance penetration (column 3 of table 6), and the real interest rate, perma-
22. This might also explain the negative sign on life expectancy. In regressions with only the old or
the young dependency ratio or life expectancy, only the old dependency ratio and life expectancy enter
negatively and significantly at the 5 percent level.
23. Because schooling data are available only at a five-year frequency, we repeat the values for the
intermediate years from the initial year of the corresponding five-year period.
24. As in the five-year panel, we include the young and old dependency ratios and life expectancy
separately, confirming our results.
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73
nent income, and the private savings rate enter positive

Neither schooling nor life expectancy shows a robust re
surance penetration. Only income per capita, inflation, a
velopment explain the variation in life insurance penetr
economies in the annual sample. Overall, the annual sam
findings from the five-year panel regressions.
Cross-Country Analysis, 1980-2000
Table 7 presents results from cross-country regressions in which we average d

over the period 1980-2000 for all economies in our sample. Although cross-
country analysis does not allow us to control for omitted variables, as in the panel
analysis, it does permit us to test the relationship between life insurance con-
sumption across countries and several time-invariant variables and to use instru-
mental variables regressions to control for biases induced by simultaneity and
reverse causation. These biases might arise especially for educational attainment
and banking sector development.
Countries with higher levels of economic and financial development, a more
educated population, lower inflation, and a shorter life expectancy have higher
life insurance penetration. Moreover, the old dependency ratio enters negatively
and significantly at the 10 percent level.25 While the results for income per capita,
inflation, and banking sector development confirm the results from our panel
analysis, those for life expectancy, schooling, and the old dependency ratio dif-
fer from the previous results. Restricting the sample to developing economies
confirms the results for life expectancy, inflation, schooling, and the old depen-
dency ratio but not for income per capita and banking sector development. The
young dependency ratio, the private savings rate, and revolutions and coups do
not enter significantly in the regressions (columns 3 and 5 of table 7). A larger
share of Muslim population reduces life insurance penetration, and a better in-
stitutional environment increases it (columns 4 and 6 of table 7).
Econometric, sampling, and frequency differences might explain the differ-
ences between the panel and cross-country results. The panel estimations allow
us to control for country-specific effects, whereas the ordinary least squares re-
gressions do not.26 Moreover, economic and demographic factors might have
different relationships with life insurance consumption across countries than
within countries over time.
Our cross-country results show a positive relationship between schooling and
banking sector development and life insurance consumption. But these results
25. As in the five-year panel, we control for multicollinearity by including only one of the following
regressors at a time: the old dependency ratio, the young dependency ratio, and life expectancy. Al-
though life expectancy continues to enter significantly and negatively, neither of the two dependency
ratios enters significantly.
26. Most developing economies do not have life insurance data for the period before 1978, so the
unbalanced panel regressions might be biased toward developed countries. We therefore rerun all regres-
sions of the five-year panel with the sample limited to 1981-2000. The results do not change significantly.
Beck and Webb 75
do not allow any inferences about a causal relationship between education and
banking, on the one hand, and the development of the life insurance sector on
the other. We therefore run two instrumental variables regressions in which we
extract the exogenous components of banking sector development and school-
ing to control for reverse causation and simultaneity bias in the empirical rela-
tionship between these variables and life insurance consumption. Specifically,
we use dummy variables indicating the origin of a country's legal system and a
variable-good crops-proxying for agricultural endowments conducive to a
large middle class and institutional development.27 Legal origin and agricultural
endowments are both exogenous variables and are highly correlated with bank-
ing sector development and schooling, as confirmed by the first-stage regressions
(the two variables explain 43 percent of the variation in banking sector develop-
ment and schooling). We use the Hansen test of overidentifying restrictions to
examine whether legal origin and agricultural endowments have any effect on
life insurance penetration beyond their effect through banking sector develop-
ment, schooling, or the other explanatory variables. In column 7 of table 7 we
instrument only for banking sector development, and in column 8 for both bank-
ing sector development and schooling.
While banking sector development enters significantly and positively even after
we instrument for it, schooling turns insignificant when we instrument for it.
The test of overidentifying restrictions is not rejected in either case, confirming
the adequacy of our instruments.28 These results show that the relationship be-
tween banking sector development and life insurance consumption is not due to
reverse causation and simultaneity bias, and the significant relationship between
schooling and life insurance consumption is most likely spurious.
Overall, the cross-country results confirm the importance of income per capita,
monetary stability, and banking sector development in predicting life insurance
consumption across countries. They also provide evidence of the importance of
religion and institutional development for life insurance consumption. Finally,
the demographic variables show a different relationship with life insurance con-
sumption in the cross-section than in the panel.
IV. CONCLUSION
In this article we analyze the determinants of life insurance consumption in

of 68 economies for 1961-2000, using four different indicators of life ins
consumption. Our main results are based on a panel of eight nonoverlapping
year periods. We test for the sensitivity of the results with a panel of annual ob
vations and a cross-country sample.
27. Beck and others (forthcoming), among many others, show that legal origin explains the varia-
tion in financial development across countries. Easterly and Levine (2003) show that good crops are a
good predictor of institutional development.
28. We also ran an instrumental variables regression in which we instrumented only schooling. The
test of overidentifying restrictions is rejected, however.
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77
Our panel estimations show that countries with higher

rent and permanent), lower inflation, and better develop
life insurance consumption. A higher ratio of old to wor
increases life insurance penetration and life insurance den
life insurance in force to GDP, perhaps reflecting the dif
tality risk, savings, and annuity components in these m
vate savings rate and a higher real interest rate are also
life insurance consumption. The young dependency ratio,
schooling have no strong association with life insurance consumption across
countries.
The share of life insurance premiums in private savings is best predicted by
the old dependency ratio, inflation, banking sector development, and the pri-
vate savings rate but not by income per capita. The results suggest that the older
the population and the lower the inflation rate, the more people will select life
insurance over other forms of savings. But as private agents save more, the share
of life insurance in their portfolios declines even though they invest some of their
additional savings in life insurance policies. Restricting the sample to develop-
ing economies makes many of the results less significant, but macroeconomic
stability and well-developed banks continue to predict higher life insurance con-
sumption across developing economies.
The cross-country estimations confirm some of the panel results and con-
tradict others. Most notably, we find a positive relationship between school-
ing and life insurance consumption, though it is not robust to controlling for
biases induced by reverse causation and simultaneity. By contrast, the positive
effect of banking sector development on life insurance consumption is robust
to controlling for these biases by instrumenting with legal origin and agricul-
tural endowments. This evidence suggests that banking sector development
facilitates the development of life insurance and its contractual savings func-
tion. This finding does not contradict the positive effect of life insurance on
capital market development found by other authors. While an efficient bank-
ing system might help develop the life insurance sector by offering payment
services and raising confidence in financial institutions, life insurance and other
forms of contractual savings might foster the development of capital markets
through demand for long-term financial investments.
In summary, income per capita, inflation, and banking sector development
are the most robust predictors of life insurance consumption across countries
and over time. In addition, religious and institutional differences can explain some
of the variation in life insurance consumption across countries. But there is no
robust link from schooling and the demographic variables to life insurance con-
sumption. Finally, although life insurance is a luxury good, there is no relation-
ship between income distribution and life insurance consumption. Rising income
per capita helps drive life insurance consumption, but income distribution does
not appear to do so.
Beck and Webb 79
The results provide a thorough review of existing hypotheses about

mand for and supply of life insurance. They also have implications for
makers. Both monetary stability and banking sector development hav
effects on economic development and growth independent of their p
fect on the development of the insurance sector. Moreover, they may
mental to the growth of savings and investment through life insurance,
particularly in a developing economy.
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APPENDIX TABLE A-2. Additional Correlations
Life insurance
Variable penetration Gini index Urbanization Social security
Gini index -0.2626*** 1.0000

Urbanization 0.2390*** -0.3428 * * * 1.0000
Social security 0.2883*** -0.6471 * * * 0.5010** 1.0000
Real interest rate -0.0851 0.2067* * * 0.0842* -0.0220
Expected inflation rate -0.2586*** 0.2571*** 0.0917* -0.0739
Permanent income 0.5321* ** -0.5737* * * 0.5831 *** 0.6096***
Secondary enrollment 0.5475*** -0.6193*** 0.6562*** 0.7204***
Private savings rate 0.1902*** -0.2494 * * * 0.1668 * * * 0.1749***
Revolutions and coups -0.0698 0.1528** -0.2570*** -0.2867***
Human development index 0.4415*** -0.4772*** 0.7555*** 0.6363***
Rule of law 0.3519*** -0.6012*** 0.5253*** 0.6120***
Inflation volatility -0.2125 * * * 0.2094 * * * 0.0385 -0.0700
Institutional development 0.5232*** -0.6076*** 0.6233 * * * 0.6477***
Catholic -0.2069* 0.2286* 0.0851 0.0348
Muslim -0.3057* * 0.0878 -0.2667* * -0.2842**
Protestant 0.3165 ** -0.2236* 0.2488** 0.3201 * * *
British legal origin 0.3364*** 0.1623 -0.1080 -0.1716
French legal origin -0.4565*** 0.4044* * * -0.0302 -0.2524* *
Socialist legal origin -0.2333* -0.4044 * * * -0.1189 0.3565 $ * *
German legal origin 0.4518*** -0.2774** 0.1484 0.0397
Scandinavian legal origin 0.1000 -0.2591 * * 0.2296* 0.3059**
Good crops 0.1048 -0.6832*** 0.3525*** 0.5585***
*Significant at the 10 percent level.

**Significant at the 5 percent level.
* *Significant at the 1 percent level.
Source: Authors' calculations.
Beck and Webb 83
Real Human
interest Expected Permanent Secondary Private Revolutions development
rate inflation rate income enrollment savings rate and coups index
1.0000
0.6610*** 1.0000
-0.0421 -0.2065*** 1.0000
-0.0461 -0.1225** 0.7617* 1.0000
0.0799 -0.0136 0.3366*** 0.3194*** 1.0000
0.0756 0.0879 -0.3100*** -0.2630*** -0.1847*** 1.0000
0.0008 -0.0826 0.7705*** 0.8544* * * 0.2761 * ** -0.2812*** 1.0000
-0.0593 -0.2483*** 0.7354** * 0.7050*** 0.3078*** -0.4591*$* 0.7611***
0.5876*** 0.9002*** -0.1860*** -0.1120** -0.0398 0.1246* * -0.0535
-0.0813 -0.3256*** 0.8112*** 0.8363*** 0.3307** -0.2650** 0.8547***
0.2258* 0.2500** -0.1082 -0.0890 -0.2702** 0.1945 0.1090
-0.0878 -0.0604 -0.3167"$ -0.3291 -0.1323 -0.0248 -0.4936***
-0.0950 -0.2097* 0.5781*$* 0.4440*** -0.0659 -0.1618 0.3531 x * *
-0.1192 -0.1887 -0.013 -0.0667 0.2068 0.0077 -0.1031
0.1937 0.1773 -0.3384*** -0.3296*** -0.4266* 0.1928 -0.2571 * * *
-0.0410 0.2621** -0.2169* 0.0950 0.3284* * -0.0810 0.0844
-0.0575 -0.1917 0.4395*** 0.2421** 0.3667* * -0.1227 0.2566**
-0.0553 -0.1303 0.4621* ** 0.3842*** -0.1257 -0.1552 0.3070***
-0.0373 0.0841 0.3076** 0.4809*** 0.1646 -0.2639** 0.4157*$$
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Beck and Webb 85
APPENDIX TABLE A-4. Economies in the Sample for Each Measure of Life
Insurance Consumption
Life insurance Life insurance Life insurance

Economy penetration and density in private savings in force to GDP
Algeria *
Argentina *
Australia * * *
Austria * * *
Belgium * * *
Brazil * * *
Bulgaria *
Cameroon *
Canada * *
Chile * * *
China * *
Colombia $ *
Costa Rica * * *
Croatia X
Cyprus * *
Czech Republic *
Denmark * * *
Dominican Republic * * *
Ecuador * * *
Egypt, Arab Rep. * * *
El Salvador *
Fiji*
Finland * $
France * * *
Germany * * *
Great Britain *
Greece * * *
Guatemala $ * *
Honduras *
Hong Kong, China *
Hungary *
Iceland * * *
India * *
Indonesia * *
Iran, Islamic Rep. of * *
Ireland * *
Israel * * $
Italy * * *
Japan * * *
Kenya $
Korea, Rep. of * * $
Malaysia * * *
Mexico * * *
Netherlands * * *
New Zealand * * *
Norway * * *
Pakistan * * *
Panama * *
(continued)
APPENDIX TABLE A-4. (continued)

Life insurance Life insurance Life insurance
Economy penetration and density in private savings in force to GDP
Peru
Philippines * * *
Poland * $
Portugal * * *
Romania *
Singapore
Slovenia *
South Africa * * *
Spain
Sweden * * *
Switzerland * * $
Syrian Arab Republic *
Taiwan, China
Thailand * * *
Tunisia * * *
Turkey
Uruguay
United States $ * *
Venezuela, RB * * *
Zimbabwe * *
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Economic, Demographic, and Institutional Determinants of Life Insurance Consumption

Economic, Demographic, and Institutional

Thorsten Beck and Ian Webb

Life insurance companies play an increasingly important role in the financial

tion in the use of life insurance across countries raises que

measures the weight of life insurance premiums in the private savi

I. MEASURING LIFE INSURANCE CONSUMPTION ACROSS COUNTRIES

of a country spends on insurance on average, expressed in constant dollars.3

ket, the mortality risk component, as measured by the net amount

II. DETERMINANTS OF LIFE INSURANCE CONSUMPTION

In this section we describe the theoretical underpinnings of our empirical tests

(1) (1 - lp)F = max([(1 - lp) /1(1 - p)]118TC - W,0}

TABLE 1. Descriptive Statistics

Variable Mean Median SD Maximum Minimum Observations

Life insurance penetration 1.69 1.03 1.97 12.69 0.00 322

Source: Appendix table A-1.

66 6 66oooott <6 <

U~~~~~~~0 .u,, .Nn; tl 2 m $

i_, C.,, OVra

the pricing and reserve requirements for products as

TABLE 3. Determinants of Life Insurance Consumption across Countr

Note: This table assumes the division of

mature death of the primary w

Societies with a longer life expectancy should have lower m

negatively related to demand for life insurance, we do not have prior

11. Outreville (1992) also proposes a relationship between financial devel

able to purchase life insurance than in a poor country with a less eq

A vibrant life insurance market depends to a large extent on the institutional

Descriptive Statistics and Correlations

ance consumption at the 1 percent level, with the notable ex

III. EMPIRICAL RESULTS

Because of the significant correlations between many of the possible det

Panel Analysis, 1961-2000

Our main results are based on an unbalanced panel of 68 economies, with da

and time-specific effects in our regression and estimate the regres

Variable (1) (2) (3) (4) (5) (6)

Constant -7.069 -8.372 -6.073 -5.662 -8.011 -7.133

Real interest rate

Private savings rate

F-test time dummies 2.67** 2.59** 3.23*** 1.31 3.95*** 2.75***

*Significant at the 10 percent level.

1.89* 2.45** 2.02* 1.76 0.46 1.12 3.39** 4.02

lowing year-confirms the results (column 6 of table 4).19 Infl

economies, however, only banking sector development enters signific

Annual Panel, 1961-2000

Table 6 presents results for a panel of annual observations. Using annual ra

O~~~~~- 0 _ ' 4 oo 2 rq o tn4 o o O

; - Q 'e Q t e F ~ ~ ~> u < 4o

- >~~~~(1 C> o) t- t- ?T q mtq

* * * > 4 o > ? S~~~~~~~~~~ (

nent income, and the private savings rate enter positive

Cross-Country Analysis, 1980-2000

Table 7 presents results from cross-country regressions in which we average d

In this article we analyze the determinants of life insurance consumption in

> oo t, r-- C" 1 o o t- cn r o o

< *N0000N0000P* N1*^\O1r^

OI v a r-. lto 0 )OM <1\ t- (7 \ 00) n ONN q

o~~~~~~~~~ ~ ~ ~~~~~~~~ u o. .-ot

Our panel estimations show that countries with higher

F-test time dummies 2.67 2.59 3.23* 1.31 3.95* 2.75***

< N0000N0000P N1*^\O1r^

V 0 0 0~~~~~~0 ~ 5C 4-'- 0 -: