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The role of distribution channels in market discipline for the life insurance industry

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Abstract

This paper investigates the role of distribution channels in market discipline for the life insurance industry as marketing intermediaries help transmit information between insurers and consumers. Based on life insurance data in Taiwan during 2004–2013, the paper analyses the relationship between insurance demand and insurers’ enterprise risk considering the effect of the distribution channel. The empirical results suggest that the distribution channel is an influential factor in insurance demand. The results also show that insurance demand and choice of distribution channel in Taiwan are responsive to insurers’ enterprise risk. These findings suggest that insurance commissioners should consider the role of marketing intermediaries when market discipline is adopted as an approach for surveillance of the insurance market.

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Notes

  1. Market discipline constitutes one of the three pillars of Solvency II regulation and has been implemented since 2016 in the European Union market, according to http://europa.eu/rapid/press-release_MEMO-15-3120_fr.htm. Retrieved 30 Sept 2017.

  2. For example, Chiappori and Salanie (2000).

  3. The lemons market problem implies that buyers cannot distinguish between sellers, see Akerlof (1970).

  4. Source: Swiss Re (2008)–(2017), “World Insurance”.

  5. Source: Taiwan Insurance Institute (2016).

  6. Source: Risk Management, Insurance & Finance Magazine, RMIM (2011), https://www.rmim.com.tw/news-detail-2460. Retrieved 19 March 2019.

  7. The market share of other channels (e.g., brokers, agencies and mail order) is very small in Taiwan (around 5%), and they are thus omitted in the empirical study.

  8. For example, Hasan et al. (2015).

  9. For example, Epermanis and Harrington (2006) and Eling and Schmit (2012) investigate premium growth and contract termination, which are related to consumers rather than investors.

  10. According to Seog (2010), the premium is the present value (PV) of the expected insurance coverage. The higher the interest rate (investment return), the lower the PV and premium rate.

  11. Fung et al. (2018) show that insolvency risk increases if a life insurer specialises in risky products.

  12. In marketing terminology, “marketing mix” includes price, product, promotion and place (i.e., 4 Ps).

  13. The data for corporate reputation after 2013 are not fully disclosed for all insurers.

  14. The website for the TII data is https://www.tii.org.tw/opencms/actuarial/actuarial3/. Retrieved 30 Sept 2017.

  15. The website for the FSC data is https://www.ib.gov.tw/ch/index.jsp. Retrieved 30 Sept 2017.

  16. RMIM is the leading insurance magazine in Taiwan, similar to A. M. Best Review in the U.S.

  17. Epermanis and Harrington (2006) and Eling and Schmit (2012) use total premium growth for insurance demand. However, the total premium is not a good measurement for studying the Taiwanese market. Because life insurance is a long-term contract and the Taiwanese market was closed during 1962–1993, the eight “old” insurers have many more insurance policies than the new insurers (established after 1993). Therefore, total premiums do not reflect consumers’ preference.

  18. The market share through these two channels was around 95% during the study period 2004–2013.

  19. The insurance market in Taiwan was not open to foreign investors until 1987. During 1987–1993 only two branch offices of U.S. insurers were permitted to enter the market per year because of the bilateral trade agreement between Taiwan and the U.S. In 1994 the market was fully opened to global investors due to the WTO and GATT agreements. Therefore, the history of foreign insurers in Taiwan is short and their business volume is usually smaller than domestic companies’.

  20. In insurance solvency literature product risk is referred to as the risk of policy reserves (i.e., liabilities on the balance sheet), which is different from product fairness in the underwriting construct. Product pricing fairness is referred to in the insurance contract design itself.

  21. Asset risk and product risk are initially defined by RBC regulation in the U.S. Baranoff and Sager (2002) use RBC risk factors and formulas to calculate asset risk and product risk.

  22. In practice, consumers may raise complaints related to loss adjustment for many reasons, not restricted to product fairness. Since direct surveys from consumers are impossible, factor analysis is a popular method for extracting the latent variable of fairness.

  23. In practice, complaints not related to loss adjustment are not restricted to service quality. Besides, increasing business expenses cannot guarantee better service in practice. However, they are relevant factors frequently referred to in the literature for measuring service quality. Therefore, factor analysis is applied to these two variables.

  24. Roberts and Dowling (2002) use ‘America’s Most Admired Corporation’, as surveyed by Fortune Magazine, as the measurement for reputation.

  25. This ranking has been conducted since 1993 and is well recognised in Taiwan.

  26. For example, Epermanis and Harrington (2006) and Eling and Schmit (2012).

  27. For consistency with credit rating, a higher score implies a lower risk. Rational consumers are expected to prefer insurers with higher scores.

  28. This econometric methodology issue is explained in Greene (2000), pp. 653–654. 3SLS SEMs are the better choice for systems with interdependence.

  29. In addition to new contracts, this paper also conducts an analysis based on total contracts and existing contracts in force and finds similar results.

  30. Pearson correlation indicates that risk rating and insurance demand are related. Therefore, risk rating can influence insurance demand, and insurance demand can in turn affect risk rating.

  31. Because many insurance policies sold in Taiwan are similar to savings products (e.g., endowment) with an interest rate higher than that of bank deposits, consumers prefer insurance during low interest rate periods. Interest rates have been very low in recent years in Taiwan since the global financial crisis of 2008.

  32. The dummy variable Channel is equal to 1 for salesperson and 0 for bancassurance.

  33. The market share of endowment insurance in Taiwan is around 45% during the past decade (source: TII).

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Authors and Affiliations

  1. Department of Risk Management and Insurance, National Chengchi University, 64, Section 2 ZhiNanRoad, Taipei, 11605, Taiwan

    Tsai-Jyh Chen

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Appendix

Appendix

See Tables 7, 8, 9 and 10.

Table 7 Definitions of the variables
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Table 8 Summary of the sample statistics
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Table 9 Measurements for enterprise risks of insurance companies
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Table 10 The list of sample companies for the empirical study
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Chen, TJ. The role of distribution channels in market discipline for the life insurance industry. Geneva Pap Risk Insur Issues Pract 46, 107–129 (2021). https://doi.org/10.1057/s41288-020-00172-9

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