An Econometric Model of the Life Insurance Sector of the U.S. Economy

Abstract

This article utilizes econometric methods to explain statistically the macroeconomic flows of funds through the life insurance sector of the U.S. economy. Equations are presented which deal with flows of total life insurance reserves, insurer administered pension reserves, and policy loans. Additional equations analyze fluctuations in life insurer acquisitions of corporate bonds, commercial mortgages, and other major types of assets. primary goal of the model is to augment existing knowledge of the role of life insurance in the economy. In addition, the model can be used to forecast future fluctuations in the variables involved. To illustrate another application of the model, simulation experiments are conducted to explore the impact of variable policy loan interest rates on the extraordinary policy loan flows of 1966. According to the simulations, the use of a variable loan rate equivalent to the commercial bank prime rate would have reduced considerably the policy loan demand during that period. It is hoped that the model will stimulate further econometric research into insurancerelated problems. Econometric model building has been one of the major advances in economics during the past three decades. However, the earliest econometric studies concentrated on the real sector of the economy, and comprehensive analyses of the financial sector were not developed until the 1960's.' The financial model building J. David Cummins, Ph.D., is Assistant Professor of Insurance in the University of Pennsylvania. He is Editor of the Huebner Foundation Monograph Series. This paper was submitted in November, 1972. 'The author would like to express his appreciation to Professor Lawrence R. Klein of the University of Pennsylvania for providing invaluable advice and assistance during the research underlying this study. Of course, the author bears full responsibility for any errors or omissions in the final product. 1 The pioneering financial sector model was Frank DeLeeuw, A Model of Financial Behavior, James S. Duesenberry, et al., editors, The Brookings Quarterly Econometric Model of the United States (Chicago, Rand McNally & Company, 1965), pp. 464-530. For a classic econometric study of commercial banking see Stephen M. Goldfeld, Commercial Bank Bewhich has been conducted to date has concentrated on commercial banks, the mortgage market, and savings and loans. Macroeconometric work on life insurance has been limited for the most part to tests of specific hypotheses and to the development of life insurance equations as components of larger models.2 This paper attempts to fill this gap in the literature by providing a comprehensive econometric analysis of flows of funds through the life