Inflation and Sales of Life Insurance

Abstract

The insurance industry has recognized that anticipations of increases in the price level may cause decreases in the sales of permanent life insurance. The first part of this paper indicates that theoretically sales of both permanent and term insurance may decrease if there are anticipations of price level increases. In the second part, two models involving anticipations of price level changes indicate that large increases in the cost of living have been accompanied by relatively smaller sales of term, as well as permanent life insurance. The life insurance industry is very much aware of the effects of inflation upon the real value, as opposed to the money value, of the cash benefits which it pays to its policyholders and beneficiaries. Spokesmen for the industry are constantly urging that the nation's government follow fiscal and monetary policies which will minimize inflation in the American economy, to insure that those people living on fixed Alfred E. Hofflander, Jr., Ph.D., C.P.C.U., C.L.U., is Assistant Professor of Insurance in the Graduate School of Business in the University of California, Los Angeles. Dr. Hofflander's previous teaching included service at Florida State University and the University of Texas. He was a Huebner Fellow at the University of Pennsylvania and is now Associate Editor of C.P.C.U. Annals, Assistant Editor of Journal of Risk and and is Secretary-Treasurer of Western Association of Insurance Professors. Richard M. Duvall, Ph.D., is Associate Professor of Statistics in the University of Tennessee. His previous teaching included service at University of Texas and University of Michigan. Dr. Duvall has authored articles which have appeared in the Journal of the American Statistical Association, the Journal of Finance, Accounting Review, and Management Science. The authors wish to express their appreciation to the Connecticut Mutual Life Insurance Company for the financial support which made this research possible. This article was accepted for publication in October, 1966. incomes will not have their purchasing power decreased.1 The insurance industry also has realized that fears of the general public, anticipating future inflation, may change their pattern of insurance purchases, with more term insurance being purchased and less permanent insurance. The consequence will be a smaller volume of premium to the industry. The purchaser asserts that he will invest the difference in common stocks as a hedge against inflation. Some suggestions have been made that life insurance companies invest a larger proportion of their assets in common stocks and have part of the benefits depend upon the results obtained from the equity investments. This, it is urged, would help keep some of the permanent insurance business which the industry feels it is losing because of anticipated inflation.2 Although it has been thought that anticipation of price level changes discour'For example, see David E. Kilgour, Three Major Forces Attacking Cash-Value Insurance, The National Underwriter, September 24, 1959, Extra Edition No. 39B, Chicago, p. 8, 14-5. 2 F. J. McDiarmid, Inflation and Insurance, The Commercial and Financial Chronicle, Vol. 188, No. 5800, Dec. 4, 1958, New York, p. 9, 31-4.