UNIVERSITY OF NEW SOUTH WALES SCHOOL OF BANKING AND FINANCE INTERNATIONAL FINANCIAL SERVICES: Determinants of Bancassurance Demand and Life Insurance Consumption CSABA SZABOLCS JOSA This thesis is submitted in fulfillment of the requirements of the degree of Master of Commerce (Honours) at the University of New South Wales. 2005 CERTIFICATION I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project’s design and conception or in style, presentation and linguistic expression is acknowledged. Csaba Josa 2005 ii ABSTRACT This thesis is a pioneer study that examines the growing importance of global insurance markets and the factors that determine continued success and viability. A couple of issues relating to risk and insurance that have not been examined to such an extent in previous studies are represented through the examination of two of the fastest growing areas within international insurance services, namely those of global bancassurance and life insurance markets. Firstly, this thesis establishes what determines the demand for bancassurance using a sample of 73 companies from 28 developed and developing countries from across the globe. Methodological improvements are made on previous studies through the use of the advanced estimation technique known as Generalized Method of Moments (GMM) which helps account for such inconsistencies as measurement errors, heteroscedasticity, multicollinearity and endogeneity. The results obtained both extend and reconcile existing literature in the field of bancassurance. Secondly, the determinants that influence the level of life insurance consumption throughout the OECD are scrutinized with a particular focus on the influence of systems of law. Thus far no other study has attempted to discover the relationship between life insurance consumption patterns and the legal systems in place within a given nation. The key finding highlights the importance of systems of law on consumption patterns, and specifies that there is a significant positive relationship between the French and German civil-law systems and the level of life insurance consumption within the OECD. In addition, the findings in regards to other demographic, macroeconomic and social determinants extend as well as support the existing literature in the field of life insurance. iii ACKNOWLEDGEMENTS I would like to dedicate this thesis to my parents and my grandparents, who have never wavered in their support of me throughout my university career. Their continued backing and encouragement has made it possible for me to complete this monumental project. Special thanks must also go to my two supervisors, Professor Fariborz Moshirian and Dr. Donghui Li. I must thank Fari for his ongoing support and encouragement even during times when I did not believe in myself to finish this project. His cheerfulness, motivation and belief in me went a great deal towards helping me complete this thesis. To Donghui, I would like to extend my thanks for providing the suggestions for the two chapters that are covered within this thesis. I would also like to thank him for all his support and advice without which I would most likely have strayed from my goals and failed to complete this thesis. I would also like to extend my thanks to all my fellow honours classmates at UNSW. Your friendship and camaraderie have made these previous years some of the most enjoyable of my life. Also, I would like to thank you for all the distractions that resulted in this thesis taking a year longer to complete. Most importantly, I would like to thank Mong Nhi for putting up with me during this time. I am sure that my constant complaints about the progression of my thesis were not easy to stand. Without your support, love and patience I truly believe that I would have given up on this thesis long ago. iv TABLE OF CONTENTS CERTIFICATION iiii ABSTRACT iii iii ACKNOWLEDGEMENTS iviv TABLE OF CONTENTS vv LIST OF TABLES & FIGURES xi LIST OF ACRONYMS xii CHAPTER 1 GENERAL INTRODUCTION 1.1. INTRODUCTION 1 1.2. ROLE OF INSURANCE AND A REVIEW OF GLOBAL TRENDS 3 1.3. PURPOSE AND SCOPE OF THIS STUDY 7 1.4. OBJECTIVES AND VALUE OF THESE CHAPTERS 8 1.4.1. The Determinants of Bancassurance 8 1.4.2. Law and the Determinants of Life Insurance in OECD Countries 11 1.5. THESIS STRUCTURE 15 v CHAPTER 2 THE DETERMINANTS OF BANCASSURANCE 2.1. INTRODUCTION 17 2.1.1. Chapter Outline 20 2.2. GENERAL DEFINITIONS 21 2.3. BANKS 22 2.3.1. Introduction 22 2.3.2. Current Vulnerabilities 23 2.3.3. Advantages of Banks over Insurance Providers 28 2.4. INSURERS 29 2.4.1. Introduction 29 2.4.2. Current Vulnerabilities 30 2.4.3. Advantages of Insurance Providers over Banks 32 2.5. BANCASSURANCE 33 2.5.1. Brief History 34 2.5.2. Why Does Bancassurance Occur? 36 2.5.2.1.Gains for Banks 43 2.5.2.2.Gains for Insurers 48 2.5.2.3.Gains for Consumers 51 2.5.3. Global Breakdown 52 2.5.4. Challenges Faced by Bancassurers 62 2.5.5. Quantitative Works of Major Researchers 66 vi 2.6. DATA AND METHODOLOGY 70 2.6.1. Data Sources 70 2.6.2. Determinants of Bancassurance 75 2.6.2.1.Explanatory Variables 77 2.6.2.1.1. Risk Proxy 77 2.6.2.1.2. Customer Base/Size Proxy 80 2.6.2.1.3. Cost Savings Proxy 82 2.6.2.1.4. Revenue Increase Proxy 85 2.6.2.1.5. National Banking Sector Proxy 86 2.6.2.1.6. Level of Deregulation (within a Country) 88 2.6.2.1.7. Demand for Insurance Proxy 90 2.6.2.1.8. Level of Inflation 92 2.6.3. Model for the Determinants of Bancassurance 95 2.6.4. Ordinary Least Squares (OLS) 99 2.6.5. Generalized Method of Moments (GMM) 99 2.7. EMPIRICAL RESULTS 103 2.7.1. Whole Sample 103 2.7.2. Whole Sample less the U.S. 106 2.7.3. European Sample 109 2.7.4. Legal Systems 112 2.7.5. Analysis and Implications of Results 116 2.8. CONCLUSION 120 2.8.1. General Conclusion 120 vii 2.8.2. Avenues for Further Study 124 CHAPTER 3 LAW AND THE DETERMINANTS OF LIFE INSURANCE IN OECD COUNTRIES 3.1 INTRODUCTION 126 3.1.1 Chapter Outline 129 3.2 THE LIFE INSURANCE INDUSTRY AND SYSTEMS OF LAW 130 3.2.1 Life insurance in Current Times 130 3.2.2 Systems of Law (a Study of Legal Families) 135 3.2.3 Quantitative Works of Major Researchers 142 3.3 DATA AND METHODOLOGY 149 3.3.1 Data Sources 149 3.3.2 Law and the Determinants of Life Insurance 153 3.3.2.1 Explanatory Variables 154 3.3.2.1.1 Foreign Market Share 154 3.3.2.1.2 Dependency Ratio 156 3.3.2.1.3 Interest Rates 158 3.3.2.1.4 Inflation Levels 159 3.3.2.1.5 Life Expectancy 161 3.3.2.1.6 Foreign Direct Investment (FDI) 163 viii 3.3.2.1.7 Education 164 3.3.2.1.8 Uncertainty Avoidance Index (UAI) 166 3.3.2.1.9 Legal Rights 168 3.3.2.1.9.1 Minority Shareholder Protection 169 3.3.2.1.9.2 Investment Restriction 170 3.3.2.1.10 GDP per capita 172 3.3.2.1.11 Legal Systems 173 3.3.3 Model for the Determinants of Life Insurance 175 3.4 EMPIRICAL RESULTS AND THEIR IMPLICATIONS 179 3.4.1 Empirical Results 180 3.4.2 Analysis and Implications of Results 195 3.5 CONCLUSION 207 3.5.1 General Conclusion 207 3.5.2 Avenues for Further Study 211 CHAPTER 4 CONCLUSION 4.1 INTRODUCTION 213 4.2 THE DETERMINANTS OF BANCASSURANCE 214 ix 4.3 LAW AND THE DETERMINANTS OF LIFE INSURANCE IN OECD COUNTRIES 217 4.4 SUGGESTIONS FOR FURTHER RESEARCH 220 APPENDIX 1 224 APPENDIX 2 227 REFERENCES 229 x LIST OF TABLES & FIGURES Figure 2.1 Bancassurance Share of Life Insurance Business 35 Table 1.1 World Insurance Premiums (1995-2004) 6 Table 1.2 OECD Insurance Premiums (1995-2004) 6 Table 2.1 Sample Countries 70 Table 2.2 Descriptive Statistics 74 Table 2.3 Hypothesized Relationships 95 Table 2.4 Whole Sample Results 107 Table 2.5 Correlation Matrix for the Whole Sample 108 Table 2.6 Whole Sample (less the U.S.) Results 110 Table 2.7 Euro1 and Euro2 Results 113 Table 2.8 Civil-Law Nations Results 114 Table 3.1 Sample Countries 149 Table 3.2 Descriptive Statistics for the year 2003 152 Table 3.3 Hypothesized Relationships 176 Table 3.4 Pooled OLS and GMM Results 185 Table 3.5 Correlation Matrix 186 Table 3.6 Sub-Period Results 188 Table 3.7 Common-Law vs. Civil-Law Results 192 Table 3.8 Civil-Law Results 193 Table 3.9 Results Excluding the Systems of Law 194 Table 3.10 Premium Volumes 203 xi LIST OF ACRONYMS APRA - Australian Prudential Regulation Authority BHC - Bank Holding Company BIC - Bayesian Information Criterion CIA - Central Intelligence Agency ECB - European Central Bank GATS - General Agreement on Trades and Services GDI - Gross Disposable Income GDP - Gross Domestic Product GLB - Gramm Leach Bliley act GMM - Generalized Method of Moments GNI - Gross National Income IFS - International Financial Statistics (arm of IMF) IMD - International Institute for Management Development IMF - International Monetary Fund OECD - Organization of Economic Co-operation and Development OLS - Ordinary Least Squares U.K.