Inflation, Indexation, and Life Insurance Sales in Brazil

Abstract

Insurance industries in a growing number of countries are experimenting with indexed life insurance policies, in an effort to mitigate the value erosion produced by inflation. The present study focuses on life insurance in Brazil, before and after the advent of indexation. During both periods, rate regulations in that country have made life insurance more expensive when inflation is anticipated. The method of indexing did not correct his problem. Therefore, insurance sales are expected to decline in inflationary periods. Empirical evidence from Brazil reinforces this expectation, resulting in regulatory and indexing implications. Inflation's impact upon life insurance contracts and sales has been of increasing concern to both consumers and the insurance industry. Insurance industries in a growing number of countries are experimenting with indexed life insurance policies, whose nominal values are linked to some price index. These steps are taken in an effort to mitigate the value erosion engendered by inflation. It has been shown elsewhere [5, 7] that anticipated inflation coupled with constraining regulations can lead to higher perceived real costs of life insurance, even when policies are index-linked. Accordingly, life insurance sales can be expected to decline in inflationary periods. The purpose of this paper is to provide a systematic treatment of the influence of inflation on rational life insurance purchases, and to investigate empirically life insurance consumer response in Brazil to inflation and the advent of indexed policies. This paper is divided into three sections. In Section I, a theoretical model is developed to examine rational life insurance purchases under inflation. The construction and crucial assumptions of the model were inspired by and derive support from the economic environment and institutions that have characterized Brazil during recent decades. The first section concludes with some theoretical propositions that are subjected to empirical analysis in Section II.