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Advances in Social Sciences Research Journal – Vol.8, No.3

Publication Date: March 25, 2021

DOI:10.14738/assrj.83.9882.

Li, B. (2021). Theoretical Research on the Impact of Country Risk on Insurance Demand. Advances in Social Sciences Research Journal,

8(3) 451-458.

Theoretical Research on the Impact of Country Risk on Insurance

Demand

Bofang Li

Insurance School, Central University of

Finance and Economics, Beijing, China

ABSTRACT

Derive the optimal premium expenditure of the insured from the

consumer expected utility maximization model. On this basis, the

concept of country risk is introduced, and derive the optimal premium

expenditure of the insured in the presence of country risk is. Then

compare the optimal premium expenditure of the insured when there

is country risk and when there is no country risk, and study the impact

of country risk on insurance demand.

Keywords; Expected utility, Country risk, Insurance Demand

INTRODUCTION

In the era of major changes, risks are constantly deepening and alienating, which have a profound

impact on the international situation, economic society and people's lives. In recent years, under

the influence of global risk events such as stagnant global economic growth, geopolitical tensions,

ecological and climate crises, international trade disputes, and the new crown pneumonia

epidemic, the risks faced by countries and people around the world have gradually become

frequent, rapid and sudden. With other characteristics, the perception, capture and management

of risks has become more difficult than ever. Under the conditions of very close global economic

and trade cooperation, risk events such as trade policies, debt crises, and regime changes in

important economies will not only change their own national risk environment, but will also affect

their negative effects spread to other countries across borders under the influence of economic

globalization. Due to the differences in the political and economic systems and policies of

countries around the world, the overall macro risk environment of a country, which is formed by

the convergence of economic, financial and political risk factors, is quite different. Therefore, in

the face of the turbulent international situation, the complex and sensitive geo-environment and

the difficult recovery of the global economy, countries around the world need to deeply

understand the changes, influencing factors and development trends of national risks, formulate a

thorough national risk management plan, establish a complete national risk protection system,

and study policies and policies to deal with changes in the risk environment of other countries, so

as to face crises and changes in a strategic way.

In a complete national risk protection system, commercial insurance is an indispensable key

element. The unique nature of insurance gives it the dual characteristics of providing risk

protection and promoting the development of the real economy. It has a key role in economic and

social development that cannot be replaced by other financial formats. Therefore, increasing the

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Li, B. (20210. Theoretical Research on the Impact of Country Risk on Insurance Demand. Advances in Social Sciences Research Journal, 8(3) 451-458.

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URL: http://dx.doi.org/10.14738/assrj.83.9882

demand for insurance in the market, expanding the capital scale of the insurance industry, and

giving play to the scale effect of insurance capital can enable the insurance industry to more

effectively provide stable, comprehensive and high-quality risk protection and financial support

for economic and social development. At the same time, it is also an indispensable and important

magic weapon for all countries in the world to cope with changes in current risks and resolve risk

challenges.

After a long period of theoretical research and practical exploration, risk and insurance-related

theories have been fully demonstrated and improved, and the research on the factors affecting the

demand for life insurance has formed a basic research framework and logic. Risk is the

prerequisite for the existence of insurance. Insurance has the ability to resist and prevent risks.

The nature, volume and degree of influence of risks determine the scope, strength and demand

level of insurance. Therefore, the research on risk is the foundation of insurance theory and has

the important value of expanding the boundary between risk and insurance theory.

In the academic research on the influencing factors and effects of insurance demand, scholars

mainly analyze the insurance consumption decisions of individuals or families from a micro

perspective. The research content of risk on the demand for insurance mainly focuses on the

insurable risk, and there are few researches on the demand for insurance that take macro- uninsurable risk as the influence factor. In this context, this article is based on risk management

theory and insurance theory research, with insurance demand as the core, and studies the impact

of country risk on insurance demand.

Country risk is a risk indicator that measures changes in a country's comprehensive risk

environment based on changes in the country's overall economic risk environment, financial risk

environment, and political risk environment, and by monitoring changes in corresponding

indicators and data. Changes in the national risk index will also affect the country’s economic,

financial, and political environments, which in turn will have an impact on the demand for life

insurance. For external, macroscopic, and non-insurable risk indicators such as country risk, there

is already a relevant theoretical research foundation in the world. This article will continue to use

the existing mature research framework to study the impact of country risk on life insurance

demand in terms of theoretical models.

Since the 1980s, the concept of background risk has been gradually cited and widely studied.

Corresponding to the concept of insurable risk, background risk is generally used to represent

exogenous uninsurable risk. On the macro level, the background risks in the insurance market

include public health events, some natural disasters, political and economic policy uncertainties,

etc.; In the mid-range aspect, it includes information asymmetry in the market, market premium

scale structure risk, and insurance industry reputation risk, etc.; At the micro level, it includes the

speculative risks and crime risks of consumers and their families.

In the past few decades, many scholars at home and abroad have carried out research on

background risk theory, and there has been a certain foundation for research on how background

risk affects insurance decisions about insurable risks and household insurance needs. H. Doherty

and H. Schlesinger (1983) studied the influence of background risk on the insurance decision of

arbitrary risk aversion utility function, and discussed the optimal insurance problem under

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Advances in Social Sciences Research Journal (ASSRJ) Vol. 8, Issue 3, March-2021

background risk conditions. It is an international research on the relationship between

background risk and insurance demand. Earlier academic papers. The country risk studied in this

paper belongs to the research category of background risk in theory, and the research framework

of background risk will be used in theoretical research. The model will be established on the basis

of consumer expected utility theory, background risk theory and risk management theory, and will

be analyzed according to the actual situation of the research objects in this article. The model will

be based on the optimization of the expected utility of the micro-agents. It is necessary to make

assumptions and descriptions about the expected utility function and constraint conditions of the

micro-agents in the economy.

CONSUMER EXPECTED UTILITY THEORY MODEL

Assumptions

In the theoretical model of consumer expected utility in this article, there are the following

assumptions:

a. For consumers, they only face two risks: insurable risk and non-insurable risk;

b. Country risk and insurable risk are independent of each other;

c. The loss events of consumers are only two states: "loss" and "no loss";

d. Under the condition that there is no insurable loss, the insurance payment is zero.

Variable definitions

In the model for optimizing consumers' expected utility, we introduce the following variables:

U(∙)—The utility function of the insured,U!

(∙)>0,U!

′(∙)<0;

'—The expectation of the insured;

(—The initial wealth level of the insured;

)—Loss scale of insurable risk,) ≤ (;

+—Probability of insurable loss, +) is the expected loss value;

,—Insurance rate,, ≥ 0,,) is the compensation paid by the insurer after the loss

occurs;

.—load factor of insurance premium,. ≥ 0,(1 + m)+<1;

2—Insurance premium,2 = (1 + .),+),insurance premium 2 is proportional to the

expected loss value +)。

Optimal premium conditions for the insured with no country risk

The variables are introduced into the model for calculation and derivation, and the formula for the

optimal premium payment of the insured based on the expected utility theory is: "#$

% +'5[( − 2 − (1 − ,))] + (1 − +)'5(( − 2) (2.1)

If . = 0,the optimal value of the insurance rate , = 1,if . > 0,the optimal value of the

insurance rate ,<1。

According to the research of Wenan Fei et al. (2008), the first-order necessary conditions for

achieving the optimal insurance rate is:

[( − 2 − (1 − ,))]5′[+(1 − + − .+))] − [+(1 − + − .+ + .))]5′(( − 2) = 0 (2.2)