Variation in Individual Life Insurance Premium Revenues: An Econometric Approach

Abstract

The model developed in this paper treats individual life insurance as a consumer durable good and, consequently, as exhibiting the postponable characteristics of a durable good. Within this framework, individual premium revenues are related to prices, real income, interest rates, household formation, social security benefits, and life insurance in force. The empirical results of this study indicate the following: (1) on balance, a moderate rise in prices will augment premium revenues, (2) social security constitutes a partial substitute for life insurance protection and (3) higher interest rates depress the growth in premium revenues with approximately a one year lag. The decision to purchase individual life insurance is similar to one of buying a consumer durable good in that such purchases are postponable. As such, the sluggish performance of individual life insurance sales in 1975 may have reflected the postponement of life insurance purchases due to a decrease in real income and not a reduction in the demand for life insurance protection. Nonetheless, the slowdown in sales resulted in significantly slower growth in individual life insurance premium revenues. The intent of this paper is to construct a model to explain variation in individual life insurance premium revenues. Implicit in this model is that variation in individual life insurance sales introduces a corresponding fluctuation into life insurance premium receipts. In the first section of this study, a model is developed in which premium receipts are proportional to income and life insurance in force. The second section expands the basic model to include such factors as prices, household formation, interest rates and social security benefits. In section three, the model is estimated and a Chow test is applied to guage the stability of the equation. Finally, several inferences are made on the basis of the estimated model.