Life Insurance Markets in Developing Countries

INTRODUCTION Developing countries are not only consumers but also suppliers of insurance services. In a domestic market, the supply of insurance generally consists of services provided by national companies, with local and/or foreign capital, as well as by foreign companies and agencies or branches. Browne and Kim (1993) suggest that a number of variables may explain international differences in life insurance demand. They also suggest that a number of factors affects the supply of life insurance, although their study considers only the demand side. It is often argued that the development of financial institutions may have a significant impact on both the productivity of the economy and the volume of savings. Indeed, so important is insurance in the trade and development matrix that, at its first session in 1964, the United Nations Conference on Trade and Development (UNCTAD) (1964) formally acknowledged that "a sound national insurance and reinsurance market is an essential characteristic of economic growth" (p. 55). Insurance, like other financial services, has grown in quantitative importance as part of the general development of financial institutions. The governments of many developing countries historically have held the view that the financial systems they inherited could not serve their countries' development needs adequately, so during the past thirty years they have directed considerable efforts to changing the structure of these financial systems and controlling their operations in order to channel savings to investments, which are crucial components of development programs (United Nations Conference on Trade and Development, 1984, 1988). Recent empirical evidence suggests that developing countries have a supply-leading causality pattern of development rather than a demand-following pattern (Jung, 1986; Dee, 1986). Many governments have indeed established new financial institutions under what has been termed a "supply-leading approach" to financial development and have considered locally-incorporated insurance institutions or even state-owned monopolies an essential element of their economic and political independence. (1) The protectionism that has developed in most countries should be viewed as a decision to internally produce rather than import insurance services. Public enterprises are considered a macroeconomic policy tool and, as such, are used by governments to provide not only insurance services but also to achieve social and macroeconomic objectives such as increased employment and foreign exchange reserves. Today, almost all developing countries have a local insurance market providing coverage for most domestic risks (United Nations Conference on Trade and Development, 1984, 1988). Protective measures in the provision of insurance services can be classified into three categories: those related to establishment within the host country, access to the domestic market, and insurer operations (Skipper, 1987). The ultimate limitation on the establishment of insurance companies is a flat prohibition, the situation that prevails in monopolistic markets. Indeed, a monopolistic market technically should not be viewed as unfairly discriminatory against the local establishment of a foreign-owned insurer, since it applies equally to all potential domestic establishments. Many governments of developing countries prohibit their nationals from placing insurance in other than locally-licensed and -incorporated insurers. In most instances, a localization regulation is accompanied by a "localization of ownership" requirement that a majority, if not the totality, of ownership interests in locally-domiciled insurers must be held by nationals of the country. Insurance localization requirements stipulate that certain or all lines of insurance must be placed with locally-domiciled insurers (see Table 1). The main objective of this article is to investigate empirically the relationship between life insurance premium income, a measure of life insurance development, and the level of financial development and the market structure of insurance institutions in developing countries. …