Edward Seaga
EVER SINCE mankind recognised the difference between rich and poor as a condition of life, it has been true to say that those who save are far more likely to be among the rich and those who do not, moreso among the poor.
This should carry a strong message about the value of saving. Indeed, the desire to save can be considered to be among the principal virtues of life. After all, it is by saving that something is set aside for a rainy day.
On a bigger scale, savings enables all manner of beneficial plans to be made with greater certainty of fulfilment.
Without savings, life would be a series of abrupt stops and starts hindering the process of forward movement.
VIRTUE OF SAVING
The virtue of saving needs no embellishment. What should be of greater focus is the ways of generating savings and the means of maximising the volume and value of different instruments of savings.
Despite being a virtue, the practice of saving is not a natural tendency of mankind. Most people want immediate gratifi-cation. Ways and means have to be found to make saving so attractive as to override the impulse for early gratification.
Saving would then become a need so compelling that the desire to save would not only be a virtue to be honoured, but a deep obligation to be fulfilled.
That is where the advent of life insurance has proven to be among the greatest financial innovations the world has known.
Life insurance has become one of the greatest mobilisers for savings and for very good reasons. It is a comforting assurance in the face of so many risks and unknowns.
As a general rule, it finances a future after retirement and benefits for the family after death.
Specialised policies provide for the education of children in future years, collateral to satisfy mortgage terms to purchase homes, and, of course, on a more specialised basis, insurance covers the vicissitudes of health.
It is easy to understand, then, why life insurance is in great demand to ease the burdens of uncertainty which confront everyone in the course of the passage of life.
Notwithstanding the huge preference and key advantage which life policies would hold in the expenditure of the consumer dollar, armies of sales teams, or underwriters, become experts in pressing home the value of purchasing life insurance cover.
PROSPECTS FOR DEVELOPMENT
Their success in great part determines the volume and value of the sale of life policies in each country. This is of immense importance to the prospects of development on a national scale.
It is the substantial amount of life insurance reserve funds set aside over the years to meet the interim needs of the holders of policies that provide a dynamic element for the build-up of capital investment and national development.
Here is a well and fountain for funding giant development projects: highways; dams; water, sewerage and power supply schemes; housing developments; telecommunication networks; airports, ports, railroads; and huge industrial ventures.
All these bear one feature in common: They are long-term investments requiring long-term financing. This is precisely the type of financing provided by savings generated by life insurance policies.
Countries with more accumulated savings garnered from life insurance reserves are better able to finance major infrastructure needs. This, in turn, produces jobs, provides for welfare, and generates higher levels of economic growth and prosperity.
ECONOMIC CORRELATIONS
The United Nations Conference on Trade and Development (1964) formally acknowledged that "a sound national insurance and reinsurance market is an essential characteristic of economic growth."
If this argument is taken one step further, countries showing higher levels of policies in force should, correspondingly, show higher levels of national savings and enhanced economic performance.
The correlation between the value of life insurance, national savings and economic growth would then signal a special role for the life insurance industry in national development.
The correlations are not exact because many other factors play a role in generating savings and growth. But, in a generalised way, comparisons can be made.
Specific data are not easy
to obtain for cross-border comparisons. But using the value of premium income as a proxy for the value of life insurance policies in force produces some revealing arguments.
The total value of life insurance premiums (1994) shows that the Asian bloc of countries held a 47.87 per cent share of gross premiums on a global basis; the American share was 24.49 per cent and Europe, 25.15 per cent.
Asia is the predominant market for life insurance, with a market
share almost equal to the combined total of Europe and America. But it is not all Asian countries that share this preference. Penetration of life insurance, measured by premium income as a percentage of GDP, varies widely from 0.4 per cent in China to 10 per cent in South Korea.
The Asian component of life insurance is consistent on a broad basis with the high levels of economic growth in this region. The OECD countries of Europe and America follow but not too close behind. The correlation holds, but not fully, as Japan, a top performer, has experienced little growth over the past decade due to internal dysfunctions in the Japanese economy. There are always exceptions producing temporary anomalies.
RELIGIOUS CORRELATION
Perhaps there is a religious correlation too. The non-Christian, non-Muslim world of the east expects man to take care of the present and the future. Hence, eastern man insures heavily for future needs. The Muslim world expects Allah to take care of the future and spiritually shuns insurance against future risks. In this region, except for the wealthy oil states, economic growth is relatively slow. The Christian world is a half-way house: according to the scriptures, Jehovah will not provide for Satan's children. Hence, while good Christians can put their faith in the future beneficence of Jehovah, Satan's children will need life insurance. This partial endorsement of life insurance may explain some of the reasons why Christian countries do not grow as fast as their eastern counterparts.
Some specific examples of the relationship of life insurance to national income will further establish the point, as illustrated in Table 1.
In 1994 Greece was one of the poorest countries in the European Union with an average GDP of US$11,613 and a growth rate of -1.6 per cent. Life insurance premiums per capita in Greece was US$83.4, the second lowest among the Western democracies of Europe. By 2004, however, ten years later, life insurance premiums per capita more than doubled moving to US$179.31. Correspondingly, GDP per capita also doubled moving to US$22,200. GDP grew by an average of 4.1 per cent. Today, Greece is no longer among the poorest states in the Union. It ranks as the eleventh richest, out of a total of 25 member countries.
Countries which are short of domestic savings have to borrow heavily overseas. This is the odd situation of the American economy which although the wealthiest in the world has had to borrow externally to supplement its very low level of domestic savings.
BOOSTING SAVINGS
In 2004, gross national savings for the US economy was 13.47 per cent of GDP. Japan was almost twice as much, 23.6 per cent. This weak performance put increased pressure on the American economy to supplement domestic resources with external funds. To attract external support, the US economy must offer higher interest rates as incentives to attract the purchase of US bonds, while maintaining domestic interest rates low enough to attract the market and, specifically, to keep the mortgage market buoyant. A critical contributor to this dilemma is the strong preference for non-life insurance, such as term insurance, which does not require reserve provisions that boost savings.
Jamaica does not have a low savings rate, but if the rate was improved significantly Jamaica could finance major infrastructure projects more easily. The Portmore highway immediately comes to mind. Setting aside the use of a financially irresponsible approach, build first and source financing later, the 12 percent interest rate of the project could have been reduced if savings were encouraged to grow to provide some of the financing .
One way of boosting savings performance is by increasing whole life insurance sales. The ratio of life insurance premiums to gross national income in Jamaica in 2004 was 1.9 percent. In Trinidad and Tobago it was 5.8 percent, three times higher. What a difference it would make if the sale of life insurance was boosted sufficiently to increase the national savings rate in Jamaica substantially?
Table 1 - National income and life insurance premiums,
Selected countries, 2004Country Gross National Income (GNI) Insurance premiums Insurance premiums
(US$ billion) 2004 (US$ million) 2004 as a percentage of GNI
| Canada | 905 | 29,509 | 3.3 |
| Costa Rica | 19 | 28 | 0.2 |
| Dom. Republic | 18 | 33 | 0.2 |
| Hong Kong | 184 | 12,969 | 7.1 |
| Israe | 118 | 3,178 | 2.7 |
| Panama | 13 | 15 | 2.9 |
| Japan | 4,734 | 386,839 | 8.2 |
| Malta | 4.8 | 147 | 3.1 |
| Mauritius | 5.7 | 165 | 2.9 |
| Barbados | 2.6 | 46 | 1.8 |
(2003 only available year)
| Jamaica | 8.7 | 162 | 1.9 |
| Trinidad | 11 | 642 | 5.8 |
| Singapore | 105 | 6,459 | 6.2 |
| UK | 2,013 | 189,591 | 9.4 |
| PortugaL | 149 | 7,283 | 4.9 |
| Greece | 185 | 1,913 | 1.1 |
To be continued
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the UWI. E-mail: odf@uwimona.edu.jm.
