An Econometric Analysis of the Demand for Life Insurance Policy Loans

• DOI: 10.2307/253190
• Publication Date: 2006-06-17T05:47:45Z
• Authors: James M. Carson; Robert E. Hoyt
• Keywords: Econometric analysis; Life insurance; Econometric model

Driving Forces of Policy Loan Demand Previous research has found several variables related to the demand for life insurance policy loans, including market interest rates (Schott, 1971; Bykerk and Thompson, 1979; Cummins, 1973), personal income (Wood, 1964; Rejda, 1966), unemployment rate (Cummins, costs alternative sources credit (Day Hendershott, 1977). loans constitute a form disintermediation insurers are important because they disrupt insurer cash flow impose an opportunity cost if exceeds loan rate.(1) This article assesses impact that redesigned provisions changes in financial markets have had on risk disintermediation. The extends previous work - which focused exclusively periods fixed by investigating from 1970 through 1989, period encompassing both variable rates.(2) Because structure may shifted over sample period, test structural change is performed. While econometric analyses used quarterly data, this study uses monthly data. Market Conditions On policies issued before 1980, generally were at between 5 6 percent. Thus, various reasons, when equal or excess rates, relatively more policyowners exercised their option access values, lost use large amounts assets. outstanding end equaled $14.1 billion grew $34.8 1979. In response problem disintermediation, number remedies been proposed reduce outflow funds. Wood Rottman (1970) examine Kraegel Reiskytl (1977) Larsen (1981) discuss adjusted dividends borrowing policyowners. effort mitigate National Association Insurance Commissioners adopted Model Interest Rate Bill 1980. A version bill now law all states. According Bill, not set Moody's Composite Yield seasoned corporate bonds two months prior determination date. As decline, must accordingly (see Black Skipper, 1987, p. 140). since early 1980s, growing percentage sensitive conditions. Of course, shift was immediate; typically only new contained provision. However, offered inducements switch policies. took increased projected dividend scales dependent upon utilization. began offer enhanced exchange higher rates. New often raised 8 percent 1987). It likely introduction interest-sensitive altered last decade. Other factors be responsible loans. volatility might affect flexible nature repayment enables repay without incurring prepayment penalties associated with other types deregulation markets, allows greater money returns, also led nontraditional policies, such as universal life, said less tolerant, …