The Impact of a Public Health Emergency on the Demand for Life Insurance – An Empirical Analysis Based on Severe Acute Respiratory Syndrome

• Published date: 01 May 2023
• Author: Ying Sun,Xiaoyan Li,Yuantao Xie
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/cwe.12469

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 230–266, Vol. 31, No. 3, 2023

230

The Impact of a Public Health Emergency on the

Demand for Life Insurance – An Empirical Analysis

Based on Severe Acute Respiratory Syndrome

Ying Sun, Xiaoyan Li, Yuantao Xie*

Abstract

We examined changes in personal life insurance purchase decisions after a public health

event by incorporating perceived health risk and regret into the expected utility function.

The model predicts that the epidemic will create incremental insurance demand. Based

on the 2003 severe acute respiratory syndrome outbreak in China, we used a panel

dataset of 30 provinces from 2000 to 2007 and applied the difference-in-differences

method to confi rm the prediction empirically. The results showed that the epidemic did

not signifi cantly impact the demand for life insurance in the short term but played a role

in the long term. People increased their health-care expenditure and premiums for new

policies after the severe acute respiratory syndrome event, suggesting that the epidemic

changed people’s perceived risk and triggered anticipated regret, which increased life

insurance demand. Some robustness checks also supported our fi ndings.

Keywords: health risk, life insurance demand, public health emergency, regret theory

JEL codes: D81, G01, G22

I. Introduction

The 2003 severe acute respiratory syndrome (SARS) outbreak has not been erased

from Chinese people’s memory, and the coronavirus disease 2019 (COVID-19)

pandemic disrupted the world with greater infectivity and harm. Since pneumonia

cases were reported for the fi rst time in late 2019, the degree of infl uence and incidence

of COVID-19 have been expanding, causing a deep and extensive impact on the

global economy. At the same time, the Chinese insurance industry experienced huge

fluctuations. In the short term, the sharpest decline in premium income occurred in

*Ying Sun, PhD Candidate, School of Insurance and Economics, University of International Business and

Economics, China. Email: 201900910116@uibe.edu.cn; Xiaoyan Li, PhD Candidate, School of Insurance

and Economics, University of International Business and Economics, China. Email: 201900910117@uibe.

edu.cn; Yuantao Xie (corresponding author), Professor, School of Insurance and Economics, University of

International Business and Economics, China. Email: xieyuantao@uibe.edu.cn.

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Public Health Emergency and Demand for Life Insurance 231

the first quarter of 2020, the most serious period of the epidemic. Specifically, the

premium income for life insurance fell in February in comparison with the prior year,

and the growth rate in March was below the annual average level.1 From April, the life

insurance premium income began to show a gradual recovery from the impact of the

epidemic (Figure 1). A focus on the growth rate (the dotted line) seems to indicate that

the epidemic has only briefl y impacted the premium income of life insurance. However,

is this implication true? Will people change their future decisions to buy insurance

because of the impact of the epidemic?

Figure 1. Original premium income of life insurance in 2019 and 2020 and the growth rate

Source: China Banking and Insurance Regulation Commission and authors’ own calculations.

Much of the literature has discussed changes in people’s economic behaviors after

negative shocks, including their savings (Paxson, 1992; Christopher, 1995; Filipski et al.,

2019), credit (Christopher, 1994), holdings of risky assets (Gollier and Pratt, 1996),

and demand for catastrophic insurance (Browne and Hoyt, 2000; Gallagher, 2014;

Dumm et al., 2020). These studies commonly indicate that negative shocks are often

natural disasters, such as fl oods, hurricanes, and earthquakes. Some literature has also

discussed the persistence of behavioral changes after shocks. Cameron and Shah (2015)

showed that, if a negative shock changes people’s expectations of background risks, it

has a long-term eff ect on economic behaviors. If it aff ects expectations only in the short

term, the eff ect on behavioral changes disappears over time. Based on the data from the

Wenchuan earthquake in China, Filipski et al. (2019) argued that the negative shock

leads people to enjoy life, which causes an increase in consumption and a decrease in

1Life insurance refers to the generalized insurance of a person, including health insurance, and life accident

insurance.

Ying Sun et al. / 230–266, Vol. 31, No. 3, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

232

preventive savings, which remains signifi cant over the next 3 years. Dumm et al. (2020)

analyzed the impact of hurricanes on property insurance demand empirically, showing

that recent losses increased the demand for insurance, and the absence of recent losses

decreased that demand. Similarly, Gallagher (2014) reported a spike in insurance take-

up the year after a fl ood, followed by a steady decline to the baseline level. However,

the epidemic is diff erent from other negative shocks, such as natural disasters, because

it mainly endangers people’s health, and people’s consciousness and behaviors can

attenuate its eff ect. Agüero and Beleche (2017) showed that the 2009 H1N1 epidemic

in Mexico significantly increased health awareness and hygienic habits, resulting in

a long-term reduction in the number of cases and diarrhea mortality among children.

In the face of negative health shocks, life insurance is an important asset for hedging

health and death risks. To date, only a limited number of studies have focused on

whether the health shock of the public health emergency has had an impact on life

insurance demand after the public health event ends. This article aims to investigate

whether life insurance needs to change and whether the change was persistent after the

public health event ended.

As COVID-19 is continuing, we empirically analyze the impact on the demand

for life insurance following the 2003 SARS outbreak using 8 years (2000–2007) panel

data for 30 provinces in China. Specifi cally, we applied the propensity score matching–

difference in differences (PSM–DID) method to analyze both pre- and post-epidemic

data, which is advantageous for addressing endogeneity concerns. Our results showed an

increase in insurance demand following an epidemic loss, and the eff ect did not diminish

over time. We also employed a series of placebo and robustness checks to verify the

validity of our results.

Thus, an empirical investigation examined the positive impact of the epidemic on

demand for life insurance. Then, we tried to explain the mechanism influencing the

change in life insurance demand. According to the literature and the model discussed

in detail in Section II, risk perception and anticipated regret played an important role

in people’s behavior and the decision-making process (Chapman and Coups, 2006;

Cho and Lee, 2006; Weinstein et al., 2007), and they are regarded as the two possible

conduction mechanisms. In Section V, we test the mechanisms empirically as supporting

evidence.

Articles about the impact of the epidemic on commercial insurance demand have

focused on eff orts to explore short-term changes in insurance demand by using province-

level or city-level data (Wang et al., 2020; Qian, 2021), but little research has considered

the long-term impact and infl uencing mechanisms of the epidemic on insurance demand.

This paper diff ers from the previous literature in that it is the fi rst (as far as we are aware)