Question

1. Try to analyze the factors which might affect the demand for life insurance.

2. What is the importance of reserve for the insurance firms?

3. Why is the insurance penetration (total premium/GDP) usually low in developing countries?

Answer 1

1)The demand for life insurance is affected by certain factors namely religion , income , social security,expected inflation rate ,average life expectancy,education and fees for loading policy Thus demographic and socio economic factors help in taking decisions regarding buying of insurance.Price of the policy and wealth of the household affects the demand for insurance in adverse manner.But the risk avoiding nature of households have a positive affect on demand for insurance.Again there is a positive relation between income and life insurance.Families with house wives buy more insurance cover than families with working wives.

2)Reserve is referred to the quantity of money that insurance companies are required to keep with themselves for paying the claims which will be made by the insurer in future. In certain cases , the insurance company do not earn premium but will be required to pay, if the person who holds the policy ,cancels the policy before full term is covered.. So insurance reserves are regarded as liability of the insurance company.

3) Insurance penetration is the ratio of premium to GDP in a given year .Penetration rate shows development of insurance sector in the country.Developing countries have low per capita, low GDP,low economic growth and low level of industrialization. Insurance premium is low in developing countries because insurance is related to growth .Developing countries are poor and so to sell insurance cover to majority, premium should be affordable to the poor.Another reason may be lack of counselling in developing countries and that people are not aware of insurance except people in cities.It can also be said that legislation and law in developing countries act as disincentives for private insurance companies.