Where Will the ‘Silver Money’ Go?

• Date: 01 June 2017
• Published date: 01 June 2017
• Author: Na Young Park
• DOI: http://doi.org/10.1111/eufm.12099

Where Will the ‘Silver Money’Go?

Na Young Park

Incheon National University, (Songdo-dong) 119 Academy-ro, Yeonsu-gu, Incheon, Korea

E-mail: nayoung.park@inu.ac.kr

Abstract

Using international country-level data, this paper shows that demographic ageing

is likely to significantly 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 financially liberalised countries. This is because risk and asset

management associated with insurance and pension products could be facilitated

and more effective in liberalised financial 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 deflation (e.g., Anderson et al., 2014). While the

academic literature is rather quiet on the opportunities ageing can generate for the

financial industry and financial markets, several reports reflecting the practitioner’s 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, 459–474

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

Bank’s Global Financial Development Database and the World Development Indicators

database. The dataset consists of data from 1960 to 2011 for which relevant country-level

financial 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 definition of the United Nations (UN). The UN’s (2002) definition

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 defined 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 financial development. Therefore, I include the controls used by

King and Levine (1993) in their analyses of financial development:

1

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 inflation, as well as country fixed

effects and year effects. These controls should capture the effects of education, trade,

financial 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 significant 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.

2

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

1

These country-level controls of King and Levine (1993) are determinants of financial

development. Therefore, financial 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 specifications due to potential multicollinearity.

2

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