Despite China being the third largest life insurance market in the world, only 114 m Chinese people out of a population of 1.4 bn hold life insurance. As a result, insurance companies face serious problems. This scenario has been described as a ‘growing pain’. Might it be due to the low level of financial literacy prevailing in China? Using two unique nationally representative micro datasets, we investigate how financial literacy relates to the demand for life insurance. We find a positive association between various measures of financial literacy and both the probability of holding life insurance and the premium paid. These findings are robust to using different estimation techniques. We conclude that enhancing financial literacy may be an avenue for China to grow out of the ‘growing pain’.
- Financial literacy
- Life insurance