Academic journal article Journal of Risk and Insurance

Law and the Determinants of Property-Casualty Insurance

Academic journal article Journal of Risk and Insurance

Law and the Determinants of Property-Casualty Insurance

Article excerpt


This article examines the importance of legal rights and enforcement in influencing property-casualty insurance (PCI) consumption. We extend the existing literature by examining the role of legal factors in determining insurance density across countries. Also, measures of risk aversion, loss probability, and price, which overcome limitations of proxies used in the existing literature on insurance demand, are analyzed. Using a panel data set, we apply a generalized methods of moments dynamic system estimator, which relaxes the assumption of strict exogeneity of the regressors and produces unbiased and efficient estimates. The results show a strong positive relationship between the protection of property rights and insurance consumption, which is robust to various model specifications and estimation techniques. Moreover, the results show the purchase of PCI is significantly and positively related to loss probability and income, as well as providing weaker evidence of a negative relationship with price.


The relevance of legal rules and their enforcement in explaining the development of financial markets and economic growth has recently become the focus of much empirical research. Laporta et al. (1997, 1998, 2000) examine the importance of national legal origin on creditor and shareholder rights, along with the implications of creditor, shareholder rights, and legal enforcement on external finance. Levine (1998, 1999), Beck, Levine, and Loayza (2000), and Levine, Loayza, and Beck (2000) extend this research to examine the importance of legal systems for economic growth and financial development. An important conclusion is that the countries with poor legal rules and law enforcement have narrower debt and equity markets (see La Porta et al., 1997), and that a well-defined and enforced legal system facilitates greater financial intermediation, and thereby economic growth (see Levine, Loayza, and Beck, 2000).

Since insurance involves the legal transfer of risk, the value of the contract is dependent upon legal rules and enforcement, the efficiency of conflict resolution through the judiciary, and the stability and integrity of the law-making process. Moreover, given that insurers have a positive probability of insolvency, insurance liabilities may be viewed as analogous to risky corporate debt (see Cummins and Danzen, 1997). (1) Therefore, as in the case of debt and equity markets, it is likely that the development of insurance markets and thereby additional financial intermediation is also critically dependent upon the quality of the underlying legal system. Despite the theoretical importance of the impact of the law and its enforcement on demand for insurance, existing empirical research has not examined the extent to which property rights and law enforcement affect insurance consumption. This study fills a gap in the literature by providing an analysis of the role of law in explaining the depth and growth of the insurance industry across countries.

In addition, by utilizing a larger panel data set comprising of 44 developed and developing countries this study extends the work of Browne, Chung, and Frees (2000), Outreville (1990, 1996), and Beenstock, Dickinson, and Khajuria (1988). Beenstock, Dickinson, and Khajuria (1988) were the first to utilize a panel data set to analyze various elasticities of demand for insurance across countries. Outreville (1990, 1996) used a cross-sectional sample of emerging markets to examine the social and economic determinants of property-liability insurance and life insurance, while Browne, Chung, and Frees (2000) employed a panel data set to distinguish between common-law and statutory-law systems as a means of determining insurance consumption across OECD countries. However, legal system dummy variables were utilized to proxy the probability of loss rather than explicitly modeling the impact of the law on insurance demand. …

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