Macroeconomic Variables and the Demand for Life Insurance in Malaysia

Economic environments have a profound effect on the growth of the insurance industry. History has shown that, although the performance of the insurance industry is closely linked to economic conditions, the life business has been able to survive in different economic environments. In Malaysia, the performance of the insurance industry in 1998 was affected by an economic downturn. The insurance industry as a whole and the nonlife business experienced a negative growth rate but the life business achieved a low, positive growth rate in 1998. Because the macroeconomic environment has an important influence on life business and this area has not been greatly researched in Malaysia, this study is undertaken to examine the demand for life insurance in Malaysia from a macroeconomic perspective. More formally, work is carried out in order to study the interaction between macroeconomic and demographic variables (i.e. financial development, income, inflation, interest rate, price, stock market return, birth rate, death rate, fertility rate and life expectancy) and the demand for life insurance (by sums insured) in order to seek evidence of their relationship in the context of Malaysia. The major findings of this study indicate that the savings deposits rate and price change in insurance are two important macroeconomic variables associated with the demand for life insurance in Malaysia. However, the finding on the savings deposits rate fails to show the expected negative sign. Further research is needed in this respect in order to confirm the relationship between these two variables. A change in the price of insurance has a significant negative relationship with the demand for life insurance. This finding has an important implication on policy formulation for the policy makers of the central bank and the marketing directors of life insurance companies. This finding may be helpful to them in developing pricing strategies to achieve a specific sales target for life business.