A Subregional Panel Data Analysis of Life Insurance Consumption in Italy

• DOI: http://doi.org/10.1111/jori.12023
• Date: 01 June 2015
• Author: Gaetano Carmeci,Giovanni Millo
• Published date: 01 June 2015

ASUBREGIONAL PANEL DATA ANALYSIS OF LIFE

INSURANCE CONSUMPTION IN ITALY

Giovanni Millo

Gaetano Carmeci

ABSTRACT

We propose a subregional panel approach to the determinants of life

insurance development, with new methodological tools, applied to Italian

data. Our sample has enough variability in observables and less unobserved

heterogeneity than cross-country ones, but is potentially affected by spatial

dependence and serial correlation. We propose an encompassing estimator,

showing that the spatial diffusion process of life insurance is driven by

idiosyncratic shocks in neighbors. Our results partly reconcile the aggregate

perspective with survey evidence supporting, in contrast to international

studies, a negative link between education and risk aversion, and identifying

the positive effect of young dependents predicted by theory.

Giovanni Millo is at the Research and Development Department at Generali S.p.A., via

Machiavelli 3, 34132 Trieste, Italy. Millo can be contacted via e-mail: giovanni_millo@generali.

com. This article is a thoroughly revised version of Chapter 2 of the author’s doctoral

dissertation at DEAMS, University of Trieste. The views expressed are solely his own and do

not necessarily reflect those of his employer. Gaetano Carmeci is at the Dipartimento di Scienze

Economiche, Aziendali, Matematiche e Statistiche (DEAMS) at the University of Trieste,

piazzale Europa 1, 34127 Trieste, Italy. The author gratefully acknowledges financial support

from MIUR-PRIN (2005—Prot. N. 2005132539-002). The authors would like to thank for his

precious insights into the Italian life insurance market Roberto Menegato; for useful comments

and suggestions at various stages of this work: Giacomo Pasini, Annapaola Lenzi, Elisa Tosetti,

Roberto Cannata, and participants to the following conferences: Spatial Econometrics

Association, Cambridge 2007; European Regional Science Association, Liverpool 2008;

Applied Statistics Conference, Bled 2008; Italian Congress of Econometrics and Empirical

Economics, Ancona 2009; and to internal seminars at DEAMS, University of Trieste. They are

also grateful to two anonymous reviewers for constructive comments, which helped to improve

the article. All the computations in the article are done inside the R open-source environment

for statistical computing (R Development Core Team, 2012), using the splm add-on package for

spatial panel data econometrics (Millo and Piras, 2012) and, for spatial dependence tests, the

spdep package (Bivand, 2012). This article has been prepared as a dynamic document with the

Sweave utility (Leisch, 2002) according to the principles of literate statistical practice.

© 2014 The Journal of Risk and Insurance. 82, No. 2, 317–340 (2015).

DOI: 10.1111/jori.12023

317

INTRODUCTION

Empirical research on the determinants of life insurance consumption has followed

two main routes. One, based essentially on microdata from surveys on households,

consumers, and various subsets of the population (students, married couples, retired

people), has investigated life insurance demand from a microeconomic perspective,

in order to evaluate empirically the theoretical conclusions derived from saving

theory and in particular from the life-cycle hypothesis; see, for example, the recent

contribution by Liebenberg, Carson, and Dumm (2012) and the literature survey

therein. The other main empirical perspective has been that of aggregate market

development, usually drawing on cross-sections or panels of countries. In this latter

case, the focus has usually been on the determinants of aggregate market turnover,

sometimes labeled “demand” but perhaps more appropriately described as

“consumption,” as its observed values are the outcome of a market equilibrium

between demand and supply.

Besides their interest to insurance scholars, practitioners, an d market players,

aggregate approaches to the an alysis of life insurance consu mption find a broader

motivation in policy issues pertaining to its role in the financial sys tem and in the

aims, scope, and sustainabil ity of the welfare state. More over, the importance of

insurance for economic grow th has been extensively analyzed in the literature, both

as a component of a broader finan cial system (King and Levine, 1993) and in a stri cter

sense, as in Outreville (1996 ) and Ward and Zurbruegg (2000). In particular, Arena

(2008) provides evidence of a causal li nk from the development of the life insurance

market in a country to its e conomic growth. As regards public welfare , life insurance

has a role in supporting, or even su bstituting, it. In fact, countries relying

substantially on the privat e sector for the provision o f old age benefits typically

have very large ratios of life ins urance revenues to GDP, as it is the case for Japan, the

United Kingdom, Belgium, or So uth Korea. A third function of life insurers is relate d

to their role as institution al investors. As such, they help the efficient allocation of

resources by investing the technical reserves associ ated with insurance activity. The

financial component of life ins urance is actually very import ant because the time

span of contracts is so long that t he accumulated reserves reac h substantial

amounts.

1

The importance of insurance in the Italian economy is geographically very diverse.

Unlike what happens with nonlife insurance (see Millo and Carmeci, 2011), the Italian

life insurance market as a whole is comparatively well developed by European

standards, but striking regional differences persist, the South of the country being

generally underdeveloped with respect to the North and Center (see Figure 1, left

panel). Moreover, life insurance density is highly correlated in space, with a striking

similarity between clusters of nearby provinces (see Figure 1, right panel).

1

According to CEA, the European insurers’ association, in 2000 the ratio of life insurance

reserves on GDP (a common measure of the sector’s importance) reached 97 percent in the

United Kingdom, 69 percent in Sweden, 67 percent in Switzerland, 51 percent in France, 26

percent in Germany, and 16 percent in Italy.

318 THE JOURNAL OF RISK AND INSURANCE