Where Will the ‘Silver Money’ Go?

Date01 June 2017
Published date01 June 2017
AuthorNa Young Park
Where Will the Silver MoneyGo?
Na Young Park
Incheon National University, (Songdo-dong) 119 Academy-ro, Yeonsu-gu, Incheon, Korea
E-mail: nayoung.park@inu.ac.kr
Using international country-level data, this paper shows that demographic ageing
is likely to signicantly expand the insurance industry. This expansion is driven by
the increased need to secure earnings for post-retirement consumption, the desire
to hedge against risks associated with increasing age, and the older generations
risk aversion increasing the demand for safer assets such as insurance and pension
products. Moreover, such an expansion of the insurance industry is particularly
apparent in nancially liberalised countries. This is because risk and asset
management associated with insurance and pension products could be facilitated
and more effective in liberalised nancial markets.
Keywords: demographic ageing, demographic change, financial liberalisation,
insurance industry, insurance markets
JEL classification: G21,G28,G30
1. Introduction
Given the decreasing birth rates in the past decades and ongoing increases in life
expectancy in many countries, demographic ageing is becoming an important
phenomenon around the world. The limited literature on demographic ageing mostly
focuses on the potentially grave consequences of ageing, such as downward pressure
on or at least the stagnation of asset prices such as for stocks (Abel, 2001) and real
estate (Mankiw and Weil, 1989) and deation (e.g., Anderson et al., 2014). While the
academic literature is rather quiet on the opportunities ageing can generate for the
nancial industry and nancial markets, several reports reecting the practitioners point
of view (e.g., Ernst & Young, 2014; PwC, 2012) stress potential opportunities arising
from population ageing for the asset management industry. In particular, one can
hypothesise that the need to secure earnings for post-retirement consumption, the desire
to hedge against risks associated with increasing age, and the potential risk aversion of an
ageing population will contribute to an increase in demand for insurance and pension
Comments received throughout the formulation of this paper are gratefully acknowledged.
Special thanks go to John A. Doukas (the Editor) and two anonymous referees. Any errors
are the responsibility of the author. Correspondence: Na Young Park.
European Financial Management, Vol. 23, No. 3, 2017, 459474
doi: 10.1111/eufm.12099
© 2016 John Wiley & Sons, Ltd.
products. Therefore, this paper addresses the question of how demographic ageing will
contribute to the growth of the insurance industry and discusses the factors that can spur
such growth.
I examine this issue empirically by using a merged dataset derived from the World
Banks Global Financial Development Database and the World Development Indicators
database. The dataset consists of data from 1960 to 2011 for which relevant country-level
nancial and demographic data are available. I use the ratio of insurance company assets
to the gross domestic product (GDP) as an indicator of the growth of the insurance
industry. Regarding indicators of demographic ageing, I use the proportion of the
population aged over 65 years as a dummy variable for classifying a country as an aged
society, following the denition of the United Nations (UN). The UNs (2002) denition
of an aged country is a country whose proportion of the population above age 65 years is
14% or above and an ageing country is dened as one whose proportion of the population
above age 65 years is 7% or above.
The effects of demographic ageing are not easy to analyse due to many potentially
confounding factors. For example, education can increase average labour productivity,
which could compensate for the potentially lower productivity of an old population
and/or decrease in the working-age population. In addition, investments do not need to
equal savings in an open economy; therefore, the effects of demographic ageing can
vary, depending on the openness of the economy. The effects could also differ according
to the stage and speed of nancial development. Therefore, I include the controls used by
King and Levine (1993) in their analyses of nancial development:
the ratio of imports
and exports to the GDP, the GDP per capita, the per capita GDP growth rate, the ratio of
public social expenditures for old age to the GDP, and ination, as well as country xed
effects and year effects. These controls should capture the effects of education, trade,
nancial development and other economic phenomena.
The data are surprisingly consistent with my predictions. The average ratio of
insurance company assets to the GDP in an aged society is 34.97%, whereas the average
ratio of insurance company assets to the GDP in a non-aged society is 10.98%, with a
statistically signicant difference. Furthermore, the difference remains robust to the
inclusion of the aforementioned control variables in panel regressions. According to the
regression results, as the proportion of the aged in a population increases by 1% in an
aged country, the ratio of insurance company assets to the GDP increases by 0.94%.
Economically speaking, this implies that, in an aged country, as the proportion of the
aged is projected to increase from 17.62% to 30.06% from 2015 to 2050 (the average
demographic ageing expected in aged countries according to UN population estimates),
the ratio of insurance company assets to the GDP will increase from 34.90% to 46.59%,
everything else being equal.
Assuming that the per capita GDP of an aged country is
constant at USD 26,801.06 (the average per capita GDP of ageing countries) in
These country-level controls of King and Levine (1993) are determinants of nancial
development. Therefore, nancial development measures such as the size and depth of the
stock market, the debt market, and banks are not included as additional controls in my
regression specications due to potential multicollinearity.
This is calculated as the increase in the ratio of the 65þyears population to the total
population (30.06% 17.62%) 0.94% þthe initial ratio of insurance company assets to the
GDP (34.9%).
© 2016 John Wiley & Sons, Ltd.
460 Na Young Park

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