Law and the Determinants of Property-Casualty Insurance

By Esho, Neil; Kirievsky, Anatoly et al. | Journal of Risk and Insurance, June 2004 | Go to article overview

Law and the Determinants of Property-Casualty Insurance


Esho, Neil, Kirievsky, Anatoly, Ward, Damian, Zurbruegg, Ralf, Journal of Risk and Insurance


ABSTRACT

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.

INTRODUCTION

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. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Law and the Determinants of Property-Casualty Insurance
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.