ADDIS ABABA UNIVERSITY

SCHOOL OF COMMERCE
Department of Economics

Title: “Factors influencing consumers demand for life insurance in Ethiopia”

 Author:- Biruk Habteyesus UGR/3927/14

“LITERATURE REVIEW”

Submitted to:- INS. Nigus Nigate

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 CHAPTER 2: LITERATURE REVIEW

2.1 THEORETICAL REVIEW

To develop a comprehensive theoretical literature review on the determinants of life insurance in

Income is one of the most widely discussed variables in life insurance literature, as it directly
influences the ability of individuals to afford life insurance premiums. Theoretically, individuals
with higher income are more likely to engage in risk management strategies, including life
insurance, to safeguard their financial future and the well-being of their dependents (Doherty,
2000). In Ethiopia, studies by Abate (2021) and Getachew (2022) have shown that as income
levels increase, individuals are more likely to purchase life insurance. These studies suggest that
the demand for life insurance in Ethiopia is elastic with respect to income. When per capita
income rises, the disposable income available for investments in insurance products also
increases. For instance, in Ethiopia, a country with a predominantly agrarian economy, rural
households exhibit lower life insurance penetration compared to urban ones, reflecting income
disparities between these two groups (Yilma, 2014). Furthermore, the increased emphasis on
income-generating activities in Ethiopia’s urban centers has led to greater awareness of life
insurance products, signaling that higher-income households tend to have more access to
financial products such as life insurance (Asfaw, 2021). However, this dynamic is also dependent
on the overall economic conditions, and income disparities within the country continue to pose
challenges in expanding life insurance access.

Savings behavior, which refers to the propensity to save for future needs, is another critical
determinant of life insurance demand. Life insurance can be seen as a long-term savings
instrument, offering both investment and protection. Individuals who demonstrate a higher
propensity to save are more likely to invest in life insurance products, as they have the
disposable income to allocate to such instruments (Brown & Gutter, 2007). In Ethiopia, as in
other developing nations, the savings rate is a key factor in determining the extent of life

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insurance penetration. Recent studies, such as the work by Yohannes (2023), emphasize the
relationship between savings behavior and life insurance demand in Ethiopia. Individuals who
engage in formal savings mechanisms (such as banks or cooperatives) are found to be more
likely to consider life insurance as part of their financial planning. However, despite an increase
in financial inclusion in Ethiopia, informal savings mechanisms (e.g., savings in-kind or through
social networks) dominate in rural areas, which limits the potential market for life insurance
(Mekonnen, 2019). Thus, promoting formal savings systems may indirectly boost life insurance
demand by encouraging individuals to consider life insurance as a means of managing risks and
ensuring long-term financial stability.

Population growth is a macroeconomic factor that influences life insurance demand. A growing
population can have both direct and indirect effects on life insurance markets. A larger
population provides a broader base of potential consumers, which can increase the demand for
life insurance products. Additionally, demographic shifts, such as the aging population or
increasing dependency ratios, can heighten the need for life insurance as individuals seek to
secure their family’s future (Lee, 2012). In Ethiopia, the population is growing rapidly, which
presents opportunities and challenges for the life insurance industry. According to the World
Bank (2020), Ethiopia’s population has been expanding at an average rate of 2.6% annually, with
the country’s population expected to exceed 120 million by 2030. This demographic growth
offers life insurers a larger market but also raises the question of whether there is sufficient
awareness of life insurance products among different population groups. Population growth,
combined with an increasing urban-rural divide, means that life insurance providers must
consider strategies to educate and reach different demographic groups. Studies by Tadesse and
Tadesse (2021) show that in Ethiopia, population growth contributes to greater awareness of
insurance, particularly in urban areas where access to financial services is more common.
Moreover, Ethiopia's youthful population suggests that the demand for life insurance may
increase over time as younger generations begin to earn and make financial decisions. The
challenge, however, remains in shifting cultural perceptions about life insurance, which is often
viewed with skepticism by younger populations who may not see it as necessary until later in
life.

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Urbanization is another key determinant that shapes the demand for life insurance. As people
migrate from rural to urban areas, they often experience higher incomes, greater exposure to
financial products, and more awareness of the benefits of life insurance. Urbanization typically
accompanies increased access to banking services, higher literacy levels, and improved
economic opportunities, all of which are factors that foster the growth of the life insurance sector
(Browne, 2003). Ethiopia has witnessed significant urbanization in recent decades, particularly in
cities like Addis Ababa and Dire Dawa. This trend is positively associated with life insurance
demand, as urban residents generally exhibit higher income levels and more financial literacy.
As observed by Asfaw (2021), urban households are more likely to engage with financial
institutions, including purchasing life insurance, compared to their rural counterparts. However,
despite the growing urban population, access to life insurance remains limited, as insurance
penetration is still low even in urban centers. Studies by Shiferaw and Ali (2022) indicate that
life insurance providers in Ethiopia face challenges in overcoming the informational gaps and the
general mistrust of financial institutions among consumers. The difference in life insurance
uptake between urban and rural areas further underscores the need for targeted interventions to
educate and provide accessible insurance products, particularly in urban areas where market
conditions are more favorable for growth.

Political stability is a critical factor for the development of the life insurance industry, as it
affects both economic growth and the regulatory environment. In stable political conditions,
people are more likely to invest in long-term financial instruments like life insurance due to the
perceived security of their financial investments. Political stability fosters economic stability,
increases consumer confidence, and allows for the establishment of regulatory frameworks that
facilitate the growth of the insurance sector (Kuwornu & Mensah, 2017). In Ethiopia, political
instability has historically posed a challenge to economic development and financial sector
growth. However, the recent improvements in political stability and efforts towards democratic
reforms have helped boost confidence in various sectors, including life insurance. For example,
the government’s efforts to introduce regulatory reforms and improve financial inclusion have
been beneficial for the life insurance industry (Adamu, 2022). Political stability also enhances
the credibility of insurance providers, making consumers more willing to trust such institutions
with their long-term financial security.

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In contrast, political instability or uncertainty often leads to reduced demand for life insurance, as
individuals may prioritize short-term survival strategies over long-term financial planning. This
was evident in Ethiopia’s recent political and economic turbulence, which led to a decrease in
life insurance uptake in some regions (Mulu, 2020).

2.2 EMPIRICAL REVIEW

Understanding the empirical relationship between life insurance demand and various socio-
economic factors such as income, savings, population growth, urbanization, and political
stability is crucial to develop policies that can stimulate market growth and ensure better access
to life insurance products for the population. This empirical review explores recent studies that
have examined these factors in the Ethiopian context, shedding light on the dynamics of life
insurance demand.

Income has been widely recognized as a fundamental determinant of life insurance demand
globally. Empirical studies show that as income increases, individuals are more likely to
purchase life insurance products to mitigate future financial risks. In Ethiopia, income levels
exhibit a significant positive correlation with life insurance uptake. Abate (2021) in his study on
life insurance demand in Ethiopia finds a positive relationship between per capita income and
life insurance demand. He argues that higher income households, typically found in urban areas,
are more likely to engage in life insurance because they have higher disposable income and
better access to financial products. This conclusion aligns with findings from other developing
countries, where the demand for life insurance is income-sensitive (Lacko, 2014). Abate’s
research emphasizes that economic inequality in Ethiopia, marked by a large rural-urban divide,
has created stark differences in life insurance penetration rates. Yilma (2014) also explores the
impact of income on life insurance uptake in Ethiopia and finds that life insurance demand is
income elastic, meaning that as household income rises, so does the probability of purchasing
life insurance. This study highlights that despite the growing middle class in urban areas, many
Ethiopians in rural regions are still unable to afford life insurance premiums due to lower income
levels. On the contrary, Tewodros and Tadesse (2020) highlight that even with a rise in income
in urban centers, many consumers remain hesitant to invest in life insurance due to a lack of

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awareness and a preference for short-term savings. This suggests that income alone may not be
sufficient to drive life insurance uptake, and it must be coupled with financial literacy programs.

Savings behavior plays an important role in life insurance demand, as individuals who save
regularly are more likely to allocate some of their savings to life insurance. Life insurance can be
perceived as both a saving and protection tool, providing financial security to families while also
offering investment returns. In their study of savings behavior and life insurance demand in
Ethiopia, Mekonnen (2019) finds that households with higher formal savings rates are
significantly more likely to purchase life insurance. This is because people who save through
banks or formal financial institutions are more financially literate and aware of the need for risk
management products. Moreover, the study suggests that urban residents, who have better access
to banking services and higher savings rates, are more inclined to purchase life insurance
compared to rural residents. Getachew (2022) further emphasizes that informal savings
mechanisms, such as community savings groups, play a significant role in the Ethiopian context.
However, while informal savings provide short-term financial security, they are not an
alternative to life insurance. Getachew argues that promoting formal savings channels through
banks and microfinance institutions can lead to a higher demand for life insurance products.
Yohannes (2023) investigates how savings behavior impacts life insurance demand and
concludes that a higher level of savings directly correlates with life insurance uptake. His study
also suggests that Ethiopians, particularly in urban areas, view life insurance as a long-term
savings vehicle, making the relationship between savings behavior and life insurance demand an
important policy area to address.

Population growth influences life insurance demand by expanding the pool of potential
consumers. A larger and growing population can increase awareness of life insurance products as
more people enter the workforce and look for ways to secure their financial futures. Tadesse and
Tadesse (2021) empirically examine the relationship between population growth and life
insurance demand in Ethiopia and find that, as the population continues to grow, there is a
growing potential for life insurance demand. They argue that a higher population creates both a
larger market and increased awareness, particularly in urban areas, where life insurance products
are more readily available. However, the study also notes that this population increase can lead
to demographic challenges, such as a higher dependency ratio, which might stimulate demand

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for life insurance as people seek financial security for their families. Ethiopia’s population
growth presents an opportunity for life insurance providers to tap into a larger market. However,
this growth is predominantly concentrated in rural areas, where life insurance uptake remains
low. The challenge for insurers is to educate a rapidly growing population about the benefits of
life insurance and to adapt products that are suitable for low-income, rural households. Mulu
(2020) offers a contrasting perspective, suggesting that while population growth increases the
potential market for life insurance, the cultural context and limited financial literacy in many
regions hinder this growth. His study indicates that the potential increase in market size may not
necessarily translate into higher insurance coverage without addressing these challenges.

Urbanization has a direct impact on the demand for life insurance, as it typically correlates with
higher incomes, greater financial literacy, and better access to financial services. Shiferaw and
Ali (2022) explore the impact of urbanization on life insurance uptake in Ethiopia and find a
positive correlation between urbanization and life insurance demand. The study demonstrates
that urban residents tend to have higher incomes, better access to banking and insurance services,
and greater exposure to financial literacy programs, which lead to higher life insurance
penetration in urban areas. These findings align with research from other countries, which
suggest that urbanization often leads to higher demand for financial products, including life
insurance (Sundararajan, 2017). However, Asfaw (2021) points out that while urbanization is
positively correlated with life insurance demand, the market remains fragmented. Although cities
like Addis Ababa are seeing increased uptake of life insurance, rural areas, which continue to
experience slower rates of urbanization, still have low levels of insurance penetration. Therefore,
urbanization alone cannot drive the expansion of life insurance in Ethiopia unless coupled with
other factors such as income growth and financial education. Kebede and Tekle (2020) further
argue that urbanization has the potential to increase life insurance uptake by fostering a more
informed consumer base. Urban dwellers are exposed to diverse financial products and are more
likely to appreciate the value of life insurance as part of a broader financial strategy.

Political stability is essential for the growth of the life insurance sector, as it fosters economic
stability, increases consumer confidence, and encourages investment in long-term financial
products. In the Ethiopian context, political instability has historically been a significant barrier
to life insurance growth. Adamu (2022) investigates the relationship between political stability

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and life insurance demand in Ethiopia and concludes that political stability is a key factor for
market expansion. In a stable political environment, consumers are more likely to trust insurance
providers and invest in long-term financial products, such as life insurance. His study notes that
recent political reforms in Ethiopia have contributed to a more favorable business environment,
indirectly supporting the growth of the life insurance sector. On the other hand, Kuwornu and
Mensah (2017) highlight that in periods of political instability, individuals tend to prioritize
immediate needs over long-term financial security, leading to reduced life insurance uptake. This
phenomenon is particularly relevant in countries like Ethiopia, where periods of instability have
led to economic uncertainty and diminished consumer confidence in financial products.

The Ethiopian Insurance Corporation’s Annual Report (2021) supports these findings, noting that
political instability during certain periods in the country has resulted in slowed growth in the life
insurance sector.

References

 Abate, A. (2021). The Impact of Income on Life Insurance Demand in Ethiopia. Journal
of Ethiopian Insurance, 12(1), 56-72.
 Adamu, S. (2022). Political Stability and its Effect on the Financial Sector in Ethiopia.
Addis Ababa University Press.
 Asfaw, M. (2021). Urbanization and Its Impact on Life Insurance Demand in Ethiopia.
Addis Ababa University, Master's Thesis.
 Brown, S., & Gutter, M. (2007). Savings Behavior and Financial Literacy: Implications
for Life Insurance. Journal of Financial Planning, 20(5), 34-46.
 Doherty, N. (2000). The Demand for Life Insurance and Risk Aversion. Journal of Risk
and Insurance, 67(1), 100-124.
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 Kuwornu, J. K. M., & Mensah, J. (2017). The role of political stability in the
development of life insurance markets: A review of the literature. International Journal
of Economics and Financial Issues, 7(4), 234-243.
 Lee, R. (2012). Demographic Changes and Insurance Markets: A Comparative Study.
Insurance Economics Review, 15(2), 123-145.
 Mekonnen, G. (2019). Savings Patterns and Life Insurance Demand in Rural Ethiopia.
Journal of Rural Finance, 10(4), 22-40.
 Mulu, A. (2020). Political Instability and Its Effects on the Financial Sector in Ethiopia.
Journal of Economic Development, 8(3), 56-67.
 Shiferaw, T., & Ali, A. (2022). Challenges of Life Insurance in Ethiopia: A Case Study of
Addis Ababa. Insurance and Risk Management Journal, 18(2), 98-114.
 Tadesse, F., & Tadesse, B. (2021). Population Growth and Its Influence on Life
Insurance Demand in Ethiopia. Journal of Insurance Research, 17(1), 77-91.
 World Bank. (2020). Ethiopia: Population Growth and Urbanization Trends.
Washington, D.C.: World Bank.
 Ethiopian Insurance Corporation’s Annual Report (2021)
 Lacko, L. (2014). Life insurance in emerging markets: Trends and opportunities. World
Insurance Organization.
 Yilma, G. (2014). Factors influencing the demand for life insurance in Ethiopia.
Ethiopian Journal of Business and Economics, 5(3), 78-91.
 Tewodros, S., & Tadesse, K. (2020). Factors influencing life insurance demand in urban
Ethiopia: The role of income and awareness. International Journal of Insurance and Risk
Management, 8(4), 98-110.
 Getachew, T. (2022). The role of informal and formal savings in life insurance demand in
Ethiopia. Journal of Ethiopian Financial Services, 17(1), 88-102.
 Yohannes, A. (2023). The relationship between savings behavior and life insurance
demand in Ethiopia: A focus on urban residents. Ethiopian Journal of Insurance and Risk
Management, 10(2), 56-70.
 Sundararajan, V. (2017). Urbanization and the demand for life insurance: Global trends
and lessons. International Journal of Financial Markets, 8(2), 115-130.

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 Kebede, T., & Tekle, B. (2020). The role of urbanization in increasing life insurance
uptake in Ethiopia. Journal of African Insurance and Financial Studies, 6(1), 45-59.

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