Insurance Literacy and Spatial Diffusion in the Life Insurance Market: A Subnational Approach in Romania

Abstract

In most Eastern European countries, the life insurance market is poorly developed with respect to the income level of their citizens. Most of the academic literature investigating the determinants of this market focuses on cross-country- or individual-level studies. Our research assesses the specificities of the life insurance market at a subnational level, more specifically at the county level. The behavioral mechanisms are highlighted through cross-section linear regressions with spatial interactions on a database of 42 counties in Romania in 2015. One important result is the positive effect of insurance literacy, estimated in a national survey, on the demand for life insurance. Another significant result is the spatial diffusion process identified in life insurance density between neighboring counties. Among the control variables, we identified a significant positive impact of income and urbanization on the demand for life insurance and a negative impact of the unemployment rate.

Keywords:

• Demand for life insurance
• insurance literacy
• Romania
• spatial diffusion

JEL Classification:

• C21
• C31
• G22

Acknowledgments

We thank the Media XPRIMM group representatives, especially to Daniela Ghețu, editorial director at Media XPRIMM, who provided us with part of the preliminary database. The results and conclusions of the paper are entirely our responsibility, and the Media XPRIMM group cannot be held liable for any of the opinions stated in this paper. Our gratitude also to the participants in the Pricing, Risk, and Optimization in Management Science Conference, organized by the EWGCFM and the University of Bergamo, May 30–June 1, 2017; to the participants in the International Insurance–Reinsurance Forum, Brașov, May 23, 2017; and to the participants in the RSA Central & Eastern Europe Conference 2017: Regional Polarisation and Unequal Development in CEE: Challenges for Innovative Place-Based Policies, September 10–13, 2017, Babeș-Bolyai University, Faculty of Economics and Business Administration, Cluj-Napoca, Romania, for their useful comments. The remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. In developed countries, the real premiums experienced decreases of 2.7% in 2017 and 1.9% in 2016, while in emerging markets, the real life insurance premiums increased by 14% in 2017 and 8.3% in 2016. In 2017, Central and Eastern European countries had the second-highest real- life premium growth among the emerging countries (12%), after China (21%). In the future, it is expected that the main driver of life insurance growth will remain emerging markets (Swiss Re Institute Report 2018).

2. According to Insurance Europe Data, in 2004 Romania had the lowest value of life insurance density among 32 European countries (6 euros per capita), along with Latvia (6 euros per capita) and Turkey (10 euros per capita). In 2015, this gap remained almost the same, with 23 euros per capita in Latvia and 15 euros per capita in Turkey, compared with 20 euros per capita in Romania.

3. However, in the literature in this field, the list of indicators measuring the amount of life insurance owned could be completed with other proxies as well, such as life premium expenditure (Berekson 1972; Hwang and Gao 2003), total individual insurance or total individual insurance divided by total family income (Burnett and Palmer 1984), total insurance sales (Mantis and Farmer 1968), life insurance in force (Fortune 1973; Beck and Webb 2003), life insurance amount per family (Truett and Truett 1990), life insurance premiums (Showers and Shotick 1994; Hwang and Gao 2003). A comprehensive survey in this context is in Outreville (2012).

4. The questions were administered to a representative sample of US individuals age 50 and over in a module of the 2004 Health and Retirement Study and to young respondents (age 23–28) from the 2007–2008 National Longitudinal Survey of Youth.

5. This company uses random sampling techniques that observe international standards in the field of sampling methodology.

6. For people who were not ready to respond to the survey when contacted by phone, the questionnaire was also distributed by e-mail.

7. The multipillar pension system in Romania, implemented in 2008, offers customers, besides the social pension system, a second mandatory private Pillar, and a third voluntary private Pillar. In the following sections when we mention private pension products we refer to this third pillar which can be considered as a type of life insurance product, respectively as an annuity.

8. Data on areas of counties, number of inhabitants, and population density come from the National Institute of Statistics in Romania, 2011 census.

9. Additional information and results related to this are available upon request from the authors.

Additional information

Funding

This work was supported by a grant of the Romanian National Authority for Scientific Research and Innovation, CNCS–UEFISCDI, project number PN-II-RU-TE-2014-4-0745.