Academic journal article Risk Management and Insurance Review

A Cross-Section Analysis of the Determinants of Life Insurance Consumption in Mainland China, Hong Kong, and Taiwan

Academic journal article Risk Management and Insurance Review

A Cross-Section Analysis of the Determinants of Life Insurance Consumption in Mainland China, Hong Kong, and Taiwan

Article excerpt

ABSTRACT

This study examines some of the key factors affecting life insurance consumption in mainland China, Hong Kong, and Taiwan. It also attempts to gain an understanding of the different characteristics of the market in life insurance in each territory. Income and life insurance consumption are found to be strongly correlated, which is consistent with previous studies. Education is a significant factor. Price is found to be insignificant, largely conflicting with previous studies. Levels of social security are not significantly related. The one-child policy in mainland China has a negative effect on life insurance consumption. Differences in the level of economic development reveal a variation in life insurance consumption. Generally, the more advanced the economy, the greater the life insurance consumption. However, mainland China, which is a low-income country, shows the greatest potential.

INTRODUCTION

The aim of this article is to investigate some of the key factors determining life insurance consumption in mainland China, Hong Kong, and Taiwan (hereafter referred to collectively as the Chinese territories).1 Although a few cross-section studies of demand for life insurance have identified determinants of life insurance consumption across countries (e.g., Beenstock, Dickinson, and Khajuria, 1986; Truett and Truett, 1990; Browne and Kim, 1993; Outreville, 1996; Ward and Zurbruegg, 2002), little is known about factors affecting the demand for life insurance in the Chinese territories (Hwang and Gao, 2003).

The Chinese economies have grown to be important players in the world economy over the past 30 years.2 Their increasing economic importance is demonstrated by the size of their economies in the world market. According to the World Bank (2003), their economies3 as a whole, measured by gross national income, were ranked fourth in 2001.4 These markets share the common characteristic of significant progress in their life insurance industries. The average premium growth rate was approximately 18 percent annually in the 1990s, whereas for the world it was between 2 percent and 10 percent (Swiss Reinsurance Company, 1990-99). With the rapid growth of their markets, the share of premium income generated by these three Chinese markets was ranked eighth in life insurance markets worldwide in 2001.5

Analysis of the determinants of life insurance consumption is complex, because a country's social structure, consumer attitudes toward insurance, and social security systems play significant roles in the demand for life insurance. Prior cross-national studies have identified several key factors affecting life insurance purchase. Their findings show significant variations across countries, which suggest that these findings may not be broadly applied to the Chinese territories. Cummins, Tennyson, and Weiss (1999) point out that the principal functions of life insurance are to reduce financial burden through the flow of insurance benefits, to channel surplus funds through the purchase of asset accumulation products, and to provide risk and financial services through personal financial planning. However, access to other financial sources, such as the extended family or social security benefits, may diminish the demand for life insurance. Previously, viewing insurance as personal financial planning was less popular in countries with less-developed economies, such as mainland China, whereas, in countries with increased economic growth, such as Taiwan and Hong Kong, personal financial planning was more popular. Therefore, it is arguable that the contemporary growth of Chinese life insurance markets reflects the effects of recent changes in the economy, social structure, culture, and social security system.

The article develops two econometric models to test demand for life insurance in the three Chinese territories. The fixed effects model aims to evaluate the relationship between hypothesized factors and life insurance consumption, and it shows that there are differing intercept parameters relating to different territories in cross-sectional effects but not in time effects. …

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