Optimism, Protection Ability, and Commercial Insurance: Evidence from China
ZHOU Shuo, FU Lin, ZHANG Wentao, LI Tao
School of Economics and Management, Beijing Information Science & Technology University; School of Economics, Central University of Finance and Economics; China Center of Internet Economy Research, Central University of Finance and Economics
Summary:
Insurance is the basic instrument for managing risk in a market economy. It is the bridge that links long-term savings with long-term investment and plays an important role in economic compensation, financial integration, and social management. This study enriches and expands theories on household financial decision-making and provides policy implications for deepening financial market reform and increasing the value-added capacity of commercial insurance and household welfare. Optimism has complex implications for household commercial insurance purchases. With the development of the financial markets, commercial insurance is increasingly moving from “insurance only for protection” to “insurance for both protection and investment” (such as life insurance, universal insurance). Insurance for protection and investment provides investment attributes in terms of returns and dividends and the protection attribute of risk hedging. Optimism from the protection attribute causes individuals to underestimate the probability of unfavorable events and increases their risk appetite, thereby reducing the demand for financial assets with risk protection functions, such as commercial insurance. However, optimism from the investment attribute leads individuals to have more positive expectations about future uncertainty, thereby increasing the demand for financial assets with higher investment returns, such as commercial insurance and stocks. However, the literature does not pay much attention to the intrinsic relationship between optimism and commercial insurance market participation and has not reached a definite conclusion. A few empirical studies mainly focus on the protection attribute of commercial insurance. Most of them find that optimism reduces the willingness of individuals to purchase commercial insurance for protection, while some point out that this impact may be limited. As the related literature ignores the potential impact of optimism when commercial insurance reflects the investment attribute of household asset allocation, the conclusions are likely to be one-sided and have limited practical and instructive value. Therefore, it is important to understand how optimism can affect household commercial insurance demand by taking into consideration the protection attribute and investment attribute. As China has a high savings rate, extensive government guarantees, and a collectivist culture, would the impact of optimism on commercial insurance purchase differ depending on the ability of households to protect against risks？ An investigation of this issue can contribute to understanding the mystery of limited participation in the commercial insurance market from a new perspective of subjective beliefs, expand the literature on household financial asset allocation, help to optimize the structure of household assets, and promote the insurance industry. Using data from the China Family Panel Survey and China Household Finance Survey, this study empirically analyzes the effect of optimism on the purchase of household commercial insurance. The empirical results show that optimism has a significant and positive effect on the purchase of household commercial insurance. That is, the more optimistic the householder, the more likely they are to purchase commercial insurance of a higher amount, which seems inconsistent with the findings of studies conducted abroad. After differentiating between protection-type commercial insurance and investment-type commercial insurance, we find that the positive effect of optimistic expectations on the purchase of commercial insurance mainly results from an increased demand for investment-type commercial insurance, whereas optimistic expectations have no significant effect on the purchase of protection-type commercial insurance. This result shows that optimism has heterogenous effects on the purchase of commercial insurance across households with different protection capabilities. Specifically, optimism has a greater positive effect on households with more savings, social security coverage, and social capital than on households with less savings, social security coverage, and social capital. The contributions of this study are as follows. First, we examine the effect of optimism on the purchase of household commercial insurance using a new perspective that combines the protection and investment attributes of commercial insurance, thereby extending the research on the determinants of commercial insurance. Second, we empirically explain why optimism promotes the purchase of household commercial insurance by conducting further analyses using China-specific characteristics, such as a high savings rate, emphasis on government guarantees, and a collectivist culture.
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