The efficient operation of life companies require considerable economies of scale generated by business volume. Without growth, the insurer may not garner the business volume necessary to ensure collective pooling of insurance risks. Under the law of large numbers upon which the insurance operation relies the profitability of a life insurance company is critically dependent on its operating and financial activities. Operating activities consists of insurance operations such as selling new policies and servicing existing policies whiles financial activity consists of investing the policies’ premiums (Greene and Segal, 2004).
Most studies on the life insurance industry use premium income as output measure. Hirschhorn and Geehan …show more content…
The growth of the financial services industry is contingent on its demand.
One of the premier studies on the effect that inflation has on the purchase of life insurance is by Greene (1954) and he concludes that purchasing life insurance provides many advantages but does not provide protection against inflation. However, studies by Fortune (1972), Babbel (1981) and Williams (1986) find a link between the purchase of life insurance and annuities and inflation.
Fortune (1972) finds a positive relationship between demand for life insurance and expected price levels implying that life insurance sales rise with prices. Babbel (1981) examined data from Brazil and concluded that inflation is inversely related to life insurance demand. Williams (1986) also found that high interest rates, along with other factors cause a decline in the demand for life annuities
2.3.5 Interest …show more content…
This observation suggests that if future economic shocks are largely unpredictable, corporate growth rates in the life insurance industry are also likely to be unpredictable.
Also, high market interest rates likely result in greater disintermediation for life-health insurers in the form of policy loans (Carson and Hoyt, 1992) and guaranteed investment contract withdrawals (Carson and Scott, 1996).
2.3.6 Size of the Population
The size of the population should have a positive effect on the demand for life insurance. For given levels of per capita income and other relevant variables, a larger population not only implies a larger clientele for insurance companies, but also larger risk pools, which reduce risks for insurers and allow them to reduce fees per dollar of coverage. Population density should also have a positive effect on life insurance, by reducing marketing and distribution costs and the price of insurance (Feyen et al, 2011).
Outreville (1996) tests the effect of the share of the urban population, which should be correlated with population density, and finds that the effect is not significant.