Life Insurance and the Macroeconomy: Indian Experience

Author(s): H. Sadhak
Source: Economic and Political Weekly , Mar. 18-24, 2006, Vol. 41, No. 11, Money,
Banking and Finance (Mar. 18-24, 2006), pp. 1108-1112
Published by: Economic and Political Weekly

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 Life Insurance and the Macroeconomy
Indian Experience
It has been observed that there is a significant relationship between the demand for life
insurance and various macroeconomic variables. High growth of GDP induces an
economic effect through higher per capita and disposable income and savings, which in turn
create a favourable market demand for life insurance. On the other hand, life insurance also
provides support to the capital market and savings data pertaining to Indian life insurance
and macroeconomic variables broadly indicate a close relationship and interdependence
between macroeconomic variables and life insurance demand.

H SADHAK

he life insurance business is significantly influenced byinsurance. Accordingly, the major macroeconomic factors are the
income level (per capita and disposable income), inflation and
the state of the economy of a country and major factors
that influence it are the rate of growth of GDP, the levelsprice level, price of insurance, comparative return on investment
of domestic savings, household financial savings, disposable
of life insurance, demographic factors, etc.
income, etc. The size of the life insurance market is also influ- The income level has a very strong influence on life insurance
enced by the rate of growth of population, social security and demand in any country. The study of Cargill and Troxel (1979)
healthcare systems, changes in customs, social practices, risks and Babbel (1985), studied the impact of income levels on life
etc. It has been observed that societies in which the standard of insurance by using disposable personal income, income per capita
living has been steadily improving experience a higher insurance and found that there exists a very positive relationship between
penetration. Market competition exerts a very positive influence income level and insurance demand.
on market expansion. life insurance penetration as well as in- However, inflation has a very negative effect on the demand
surance density. The recent upsurge in the Indian economy and for life insurance. It has been observed by Browne and Kim,
market reforms leading to competition have created tremendous Outreville, Cargill and Troxel that high inflation exert a very
opportunities for the growth of the life insurance industry.strong In dampening effect on life insurance demand because of
this article an attempt has been made to focus on some key factorsa rise in the cost of living which makes life insurance purchase
costlier and less attractive. These authors have also examined
of the growth of the Indian life insurance industry in the context
of emerging macroeconomic changes. the relationships between the return on life insurance and the
yields on the competitive savings products. Cargill and Troxel
I (1979) observed that a higher interest rate on alternative savings
Determinants of Life Insurance Demand products tends to make insurance products less attractive on the
other hand a higher rate of return on life insurance tends to attract
The determinants of insurance demand and the inter-relation- individuals to purchase insurance from them.
ship between insurance and economic growth have been exam-The price of insurance also has an important influence on the
demand for life insurance as noted by Rubayah and Zaidi and
ined by many eminent authors like Outreville (1996), Cargill and
Troxel (1979) Babbel (1985) Browne and Kim (1993), Rubayah Lim and Haberman. They observed that the price of insurance
and Zaidi (2000), Damian Ward and Ralf Zurbruegg (2000). is significantly and inversely related to the demand for life
Outreville's work is notable for establishing the links between
insurance. A higher insurance cost is a discouraging factor for
development of the insurance market and the development of the the demand for life insurance. Lim and Haberman have also noted
financial sector in the economy. He observed that the levels of that the elasticity of demand with respect to price change is 1.115.
The demand for life insurance tends to have a greater magnitude
financial development directly affect the development of the life
insurance sector. of change when there is a small change in the price of insurance.
Ward and Zurbruegg (2000) studied the relationship between A small percentage reduction in price would help to increase the
development of the insurance sector and the growth of the demand for life insurance.
economy. The empirical analysis by Ward and Zurbruegg, Among the other factors, life expectancy at birth plays an
however, suggest that the role of insurance in the economy may important role in influencing the growth and demand for life
insurance in a country. A higher life expectancy at birth plays
vary across countries. They observed that growth in the insurance
sector can potentially have an effect on economic growth via an important positive role in influencing the demand for life
the short run dynamics of the lagged premium terms in the insurance. A higher life expectancy is positively related to the
life insurance demand.
restricted variance, through the long-run equilibrium relationship
between the markets, or both. They found this relationship in The factors mentioned above as determinants of life insurance
many countries like Australia, Canada, France, Italy, Japan, etc.
growth are the fundamental macroeconomic factors and form the
Studies conducted by these authors have also identified the major
linkages between the economy and the life insurance market. Life
macroeconomic and other factors impacting the demand for life insurance is an important intermediary in the financial market,

'~ ~~11 0 8 E c o n o mi08 .~Economic and Political Weekly March 18, 2006

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and also plays a very important role in the economy by mobilising in terms of growth of life-funds assets, number of policyholders
savings and supplying long-term capital for economic growth and premium income. Growth in life funds is considered to be
and as an asset allocator. Life insurance as a financial interme-
an important indicator of growth of life insurance industry and
diary contributes significantly to promoting the capital market.as can be seen from the Table 1.
The pattern of asset allocation of any life insurance company A high growth of life funds and assets of LIC was possible
among the financial instruments provides a significant insight due to a significant growth in new business, which got a boost
into its support to various segments of the market. Further, in during the post insurance liberalisation period. For the first time,
a competitive insurance market, competition among the insurers in 1999, LIC sold more than one crore (1.48 core) policies in
increases productive efficiency, provides investors with diver- a single year and in 2002 it crossed the two crore mark (2.25
sified portfolio choice, enhances liquidity and induces better crore), which increased further to 2.65 in crore in 2003. Similarly,
monitoring and corporate governance. They also facilitate risk new business of LIC increased from Rs 337.45 crore in 1958
sharing by reducing transaction cost and diversification of in- to Rs 75,316.28 crore in 1999. However, growth became faste
vestment portfolios. A strong life insurance industry promotes during the post liberalisation period and new business had gon
a developed contractual savings sector which "contributes toup a from Rs 75,316.28 crore in 1989 to Rs 1.98,707 crore in 200
more resilient economy, one that would be less vulnerable to (Table 2). LIC started with Rs 1,524 crore of sum assured wit
interest rate and demand shocks. while creating a more stable 59.74 lakh policies in force which went upto Rs 3,68,496 cror
business environment, including macroeconomic stability. The under 916 lakh policies. This, however, increased significantl
result will be a lower country risk premium. hence equilibrium to Rs 9,25,033 crore under 1,539 lakh policies.
interest rates which increase investment and ultimately accelerate An overall view of the Indian life insurance market can be
growth" [Catalan 2000]. obtained through data released by IRDA, shown in the Table
3 and 4. Accordingly, the total number of policies underwritte
II by Indian life insurance went up from 2.54 crore in 2002-03 to
Growth of Life Insurance in India 2.62 crore in 2004-05. While the premium under these policie
went up from Rs 12,325 crore to Rs 25,343 crore during the same
During recent times, the Indian economy has been performing
period with the increased competition and growth in market size.
well and the momentum of growth has picked up particularlyThere is, however, a fall in the market share of LIC in new
since liberalisation was initiated in the 1990s. Though the overall
business. In terms of the number of policies, the market share
of LIC declined from 96.70 per cent to 91.50 per cent while in
growth rate during the last decade has fluctuated, yet it remained
well above many emerging economies of the world. With furtherpremium income the market share of LIC declined from 92.03
reforms initiated in the early 1990s, there has been a significant
per cent to 78.07 per cent during the same period.
structural change in the macroeconomy and in the process the
service sector has emerged as the leading sector and engine of Table 1: Life Fund and Assets of LIC of India
growth. (Rs crore)
India is one of the countries in the world which has achieved
Year Life Fund Assets
a high growth rate in domestic savings, and a higher propensity
to save by the household sector has been maintained over the 1958 410.40 463.0
1967 1123.90 1247.54
period. During 2001-02 to 2004-05 the average gross domestic 1970 1611.03 1771.78
savings (GDS) as a percentage of GDP was 25.8 per cent as1980 5818.09 6176.93
against 23 per cent during 1998-99 to 2000-01. In spite of1990 a 23471.84 24418.75
1999 127389.06 132764.39
marginal fall in savings from 24.2 per cent in 1998-99 to 23.5
2001 186024.75 193283.0
per cent in 2001-02, the share of the household sector in GDS 2002 227008.98 242659.61
increased steadily 20.9 per cent in 1999-2000 to 24.3 per cent 2003 273004.96 290540
in 2003-04. The positive growth in the economy, expansion 2004 of 321753.53 367360

the service sector and increase in household savings all contrib-

Source: LIC Annual Repor
uted significantly to the high growth of domestic savings.
Table 2: Life Insurance Business of LIC of India
Another significant aspect of household savings is the contin-
ued preference for insurance products. Life insurance savings Year New Business Business Inforce
in India have been steadily increasing. While the share of bank No of Sum No of Sum
Policies Assured Policies Assured
deposits and provident funds has fluctuated and declined in the (in Lakh) (in Rs Crore) (in Lakh) (in Rs Crore)
household financial assets, the share of insurance funds has
1958 9.30 337.45 59.74 1523.67
increased steadily from 8.7 per cent in 1993-94 to 12.1 per cent
1967 14.06 757.94 119.98 4338.94
in 1999-2000. Further. in 2002-03, 15 per cent of financial assets
1970 13.97 1025.8 139.39 5781.2
were in life insurance funds. 1980 20.96 2733.11 220.39 17234.24
1990
However, since then the share of insurance funds in household 73.92 23279.53 403.39 81413.95
1999 148.44 75316.28 916.37 368496.1
savings has declined to 13.5 per cent in 2003-04 and to 13 per
Post-Insurance Liberalisation
cent in 2004-05. In terms of GDP, the share of insurance funds went
2000 169.78 91214.25 1012.99 534589
up from 1.5 per cent in 1999-2000 to 2.1 per cent in 2002-03 2001 196.57 124771.62 1130.24 522621.5
2002 224.91 192572.27 1257.89 668131.2
but declined to 1.8 per cent in 2004-05.
2003 242.68 179512.22 1387.88 954500.7
Indian life insurance, since nationalisation, has registered2004
a 264.56 198707.12 1539.21 925033.3
very significant growth and gradually increased its share in
Source: LIC Annual Reports (various issue
household financial savings. Growth of insurance can be seen

Economic and Political Weekly March 18, 2006 1109

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Chart 1: Growth Rate of GDP, Gross Domestic Savings and Life Chart 2: Growth Rate of Gross Domestic Savings, Household
Insurance Funds (Premium) Savings and Life Insurance Premium (Funds)
50.001 50

40.00-- 40 - L Funds HHS

30.00 - 30

20.00- 20

10.00 10

0.00 0

-10.00- di .- l o e CD (0 <0 N f O X a O>o >cn C o o o_00 0

-1 I e oo> _o o co )o) o) o o oo o
co

-20.00- - -20 5 __o a o -o o

-30.00 -30

-40.00 -40 L

-- Gross Domestic Product - Gross Domestic Savings -- Gross Domestic Savings --- Household Savings
-- Life Insurance Premium (Funds) - Life Insurance Premium (Funds)

It can be mentioned here that in general the opening of theUTI and return and gross return on life insurance
market has not provided much momentum to the growth Finally, of growth of population is expected to be dir
industry though there had been some elements of competition to the sales growth of life insurance. We have there
and expansion of product range. During the post liberalisation
out the pearson correlation matrix analysis for pop
period, the average growth rate in policies during 2002-03 the
to sum assured. The findings are in general quit
and reveal a strong relationship between life insur
2004-05 was merely 5.4 per cent as against 14.9 per cent during
1999-2000 to 2001-02 (Table 5). Similarly, the growth rate andin various macroeconomic variables.
new business premium income was 19.7 per cent as against 81GDP growth is a reflection of overall growth of economy,
per cent. The growth rate in premium income was of 137 per which has its impact on disposable income, savings and consump-
cent in 2001-02 which disproportionately influenced the post tion. A high growth rate is expected to boost savings and thus
insurance liberalisation average growth and was an aberration.
support a higher demand for financial instruments by the house-
hold sector. It can be observed from Chart 1. that GDP has
If we exclude this aberration, the growth rate seems to be better
during the pre-liberalisation period. influenced higher savings and life insurance funds. However
during the post liberalisation period, life insurance funds coul
not keep pace with GDP and GDS.
Interdependence
Interdependence ofof GDP,
GDP, Household
Household Savings Savings Table 3: Post-Insurance Liberalisation Insurance Market:
and Life Insurance Funds Premium Income (New Business)
Insurer 2002-03 2003-04 2004-05
High GDS have been strongly supported by savings in the Total Market Total Market Total Market
household sector. Overall growth in GDP and household savings (Rs lakh) Share (Rs lakh) Share (Rs lakh) Share
have significantly influenced the growth of Indian life insurance
I LIC 1134299.12 92.03 1628468.67 87.04 1978593.20 78.07
business. In fact, the growth of LIC's premium income in general
II Private
has been higher than the growth rate in GDP, except during the insurer 98184.25 7.97 242547.35 12.96 555694.47 21.93
last two years when it was lower than that in 2001-02. Further,
III Total 1232483.37 100.00 1871016.02 100.00 2534287.67 100.00

if we add the premium income of other private insurance Source:

com- IRDA Journal (various Issues).
panies, growth rates are higher than shown below. This leads
us to the crucial question about the nature of relationship between
Table 4: Post-Insurance Liberalisation Insurance Market:
macroeconomic growth and development ofthe insurance industry. Policies (New-Business)
A new dimension of this relationship has been opened up Insurer
by 2002-03 2003-04 2004-05
financial liberalisation and reforms in the Indian insurance sector. Total Market Total Market Total Market

Reforms and liberalisation are expected to exert a significant (Rs lakh) Share (Rs lakh) Share (Rs lakh) Share
impact on income, savings and insurance purchase; financialI LIC 24545583 96.70 26968069 94.21 24027393 91.50
II Private
reforms are expected to improve allocation of savings and in-
insurer 837107 3.30 1658846 5.79 2233075 8.50
surance reform is expected to increase savings. We have IIlmadeTotal 25382690 100.00 28626915 100.00 26260468 100.00
an attempt to examine the relationships between various macro-
Source: IRDA Journal (various Issues).
economic variables and life insurance purchase by the household
sector and also the impact of financial liberalisation and insurance Table 5: Growth Rates in Life Insurance Policies
sector reform. Pearson correlation matrix analysis has been carried and Premium Income

out with the help of data relating to GDP, personal disposable (Per cent)

income(PDY) household financial savings and the share of life Policies Premium Income
insurance funds in household financial savings to examine the
1999-2000 14.37 41.08
impact of these factors on life insurance purchase. Since 2000-2001
life 15.79 64.92
insurance purchase is also influenced by the rate of inflation,
2001-2002 14.42 137.11
2002-2003
rate of interest and return from alternative investment, we have 11.62 -28.11
2003-2004 12.78 51.81
selected yearly inflation rate for industrial workers, above 2004-2005
five -8.27 35.45
years deposit rates of commercial banks, dividend on units of

1110 Economic and Political Weekly March 18, 2006

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 Chart 3: Personal Disposable Income, Household Savings, more and more funds from PDY were diverted to private final
Savings in Financial Assets and Life Insurance
consumption leaving a small amount to be saved from PDY. This
also affected the growth of life insurance funds, which failed
2500000
to keep pace with PDY (Chart 3).
2000000
Table 6: Correlation Matrix of Selected Variables: GDP, GDS,
HDS and Life Insurance Funds (1980-81 to 2003-04)
1500000-
Gross Gross Household Life
1000000 Domestic Domestic Domestic Insurance
Product Savings Savings Fund
500000 (GDP) (GDS) (HDS)
GDP 1 .995 .992 .977
GDS 1 .997 .981
e ,
e s
(D r(D- roMu 0oXoop
) o o bO
o O o oc
O HDS .992 .997 1 .992
0 L Life fund .977 .981 .992 1
CD CD 0
CD0D 0rOM
CD OM CD CD 0
CD0 0CD
CD 0 0' 0Co
0 0
-_ C _ - - C - C - D -- C- - Cm Cm 04 04
Note: The above coefficients
- Personal Disposable Income (PDY) -- Savings of Household Sector (HS)
Table
-A- Household Savings in Fin Assets -9- Life Insurance Fund 7: Correlation M
Life Insurance Fund
A closer look at Chart 2 will reveal that household savings
Personal Household Household Life
have mostly followed gross domestic savings; Disposable
it is because
Savingsthe
Savings Insurance
other sectors, i e, public, private and corporate
Incomesector have
(HS) in Fin Assets Fund
(PDI)that
minimal role in domestic savings. It can be observed (HSFA)
the
contribution of the private sector to savings
PDI is around
1 4 per.998
.997 cent .991

(in GDP terms) while that of the public HSsector.997

is negative
1 since
.999 .988
HSFA .998 .999 1 .990
1999-2000. However, growth in life insurance funds (premium)
Life fund .991 .988 .990 1
though following the growth trend of household savings, has
remained much below household savings. Therefore,
Note: The one of the coefficients
above a
concerns is the gradual decline of the share of insurance premium
Table 8: Correlation Mat
(life funds) in household financial savings which has Insurance
declined
from 16.5 per cent in 2002-03 to 13 per cent in 2004-05.
CPI UTI BANKINT LICRATE LICSAV FYPGrow
It can also be observed that growth in life insurance funds since
2001-02 could not keep pace with theCPI
growth of .659*
1 .494* household
.360** .086 .215
UTI
savings. Opening up of the insurance market to.494* 1 .361players
the private .457** .060 .695*
BANKINT .659* .361 1 .461* .170 .034*
has not been able to cause any intensive penetration.
LICRATE .360** .457** .461* 1 .304** .292
In order to examine the extent of relationship
LICSAV among
.086 the above
.060 .170 .304 1 .010
selected variables (GDP, GDS and HDS) with life insurance (N) 19 16 19 19 19 22
funds, Pearson correlation analysis was carried out and the
* Correlation is significant a
analysis indicates (Table 6) that overall there are very strong * Correlation is significant
positive correlations among the selected variables with the life N indicates sample size
insurance fund. Also the correlations were statistically significant UTI is dividend on units, Ban

at 1 per cent significance level. Among the variables household

Table 9: Correlations o
domestic savings appear to have very high correlation (.992) with Insurance Premiu
life insurance funds, followed by gross domestic savings (.981)
CPI UTI BANKINT PREMIUM
and gross domestic product (.977) and all were highly significant
at 1 per cent level of significance. All these indicate that an CPI 1 .494* .659** -.524*
UTI .494* 1 .361 -.246
increase in savings and national productivity has a direct impact BANKINT .659** .361 1 -.696**
(positive) on the life insurance sale. PREMIUM -.524* -.246 -696** 1
N 20 17 20 25

Relationships between Disposable Income, Savings * Correlation is

and Life Insurance Funds ** Correlation is
N indicates Sam
Premium
Personal disposable income is another important variable is ins

determining the growth of the life insurance market. We have,Table 10: Cor
therefore, examined this issue and also carried out correlation (1980-81
analysis. POPULN PREMIUM NBPOLICY
Personal disposable income arrived at after deduction of payment
POPULN 1 .867** .913**
of direct taxes and other miscellaneous receipts of the government
PREMIUM .867** 1 .979**
from personal income. (PDY is distributed between household NBPOLICY .913** .979** 1
savings and private final consumption.) N 30 25 30

Savings as percentage of PDY was 14.5 per cent in 1950-51

** Correlati
butdeclined to 3.6 percent in 2002-03.Therefore, in relative terms POPULN is
though savings volume increased during 1950-51 to 2002-03, new policie

Economic and Political Weekly March 18, 2006 1111

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 However there seem to be strong relationships among these life insurance. On the other hand, life insurance also prov
factors, when correlation analysis was carried out with data support to the capital market and savings data pertaining to Ind
relating to personal disposable income (PDI), household savings life insurance and macroeconomic variables broadly indica
(HDS), household savings in financial assets (HSFA) and life close relationship and interdependence between macroeconom
insurance funds. Our analysis indicates overall that there are very variables and life insurance demand.
strong positive correlations among the selected variables with However, it has also been observed that in India, while the
the life insurance fund and the correlations were statistically economy in general and disposable income and savings in particular
significant at 1 per cent significance level (Table 7). Among the have registered a significant growth, life insurance demand has
variables PDI (.991) and HSFA (.990) appear to have very high not picked up (or alternatively the life insurance industry could
correlation with life insurance funds, followed by HDS (.988) not capitalise on the growth of income and savings). Therefore,
and all were highly significant at the 1 per cent level of signifi- in order to capitalise the growth potential particularly in the post-
cance. All these indicate that PDI and household investment in liberalised economy, concerted efforts need to be made to spread
financial assets have a strong impact (positive) on the life in-financial literacy, to create awareness about personal financial
surance sale.
risk management, marketing driven distribution management,
customer focused service management and technology and
Inflation, Interest Rate and Life Insurance Growth knowledge-based funds management.
The insurance market in India has switched over from supply-
Inflation is expected to have a negative correlation with life
led to a demand-led market and an upsurge in multi-product and
insurancedemandsinceitexertsadampingeffect,becausehigh inflation
multi-institution competition. Understanding this emerging market
pushes up the cost of living thus making insurance purchase less and institutionalising it in a futuristic corporate policy
dynamics
attractive. The rank correlations in Table 8 show the relationship
will enable insurance companies to capitalise on the growth
between inflation, interest rates and insurance funds. potential. rIt3
Since life insurance as a percentage of HDS did not have a
Email: hsadhak@rediffmail.com
significant relationship with the above variables, life insurance
premium (new business) was selected and the result is given in
Table 9. [The views expressed are of the author. The author is grateful to S Doss,
for statistical analysis.]
The impact of inflation interest rates, return from alternate
investment and life insurance has been studied with the help of
the annualised consumer price index for industrial workers, and References
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consumer price index (-.524), and bank interest rate (-.696). UTI
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premium (new business) as expected. Of the selected variables, Methodological Issues'. The Journal ofRisk and Insurance, Vol 46, No 2.
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bank interest has greater negative correlation with life insurance
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Development. World Bank, August.
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Canada.
moderate correlation between the LIC' s return and the CPI (.360),
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bank interest (.461) and UTI dividends (.457).
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2005 are presented in Table 10.
The analysis indicates a very strong correlation with the se-
lected variables, particularly life insurance new business, both
premium income (.867) and number of policies (.913) seem to Economic and Political Weekly
have very strong correlations with population growth.
Available from

Conclusion
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It has been observed that there is a very significant relationship Mahendra Chambers,
between the demand for life insurance and various macroeco- Magazine Market
nomic variables. High growth of GDP induces an economic 146, D N Road
effect through higher per capita and disposable income and Mumbai - 400 001
savings, which in turn create a favourable market demand for

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