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Published in: Empirical Economics 4/2017

07-07-2016

Insurance–growth nexus and macroeconomic determinants: evidence from middle-income countries

Authors: Rudra P. Pradhan, Mak B. Arvin, Sahar Bahmani, Sara E. Bennett, John H. Hall

Published in: Empirical Economics | Issue 4/2017

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Abstract

This paper examines the causal relationships between insurance market activities, economic growth, financial depth, and government consumption expenditure. We utilize a panel vector autoregressive model to test Granger causality for 18 middle-income countries over 1980–2012—a group that has not been previously studied in this literature. The results show a robust long-run economic relationship between insurance market activities, economic growth, financial depth, and government consumption expenditure. Moreover, in the short run, we find bidirectional causality between financial depth and economic growth, between financial depth and government consumption expenditure, and between insurance market activities and government consumption expenditure. Unidirectional causality exists from insurance market activities to economic growth, from financial depth to insurance market activities, and from government consumption expenditure to economic growth.

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Appendix
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Footnotes
1
Financial development refers to the factors, policies, and institutions that lead to effective financial intermediation and markets, as well as deep and broad access to capital and financial services (see, for instance, Samargandi et al. 2015; IMF 2005).
 
2
Financial depth, measured as the ratio of broad money supply to gross domestic product, is one of many possible measures of financial development.
 
3
See, for instance, Lee et al. (2013b), Chen et al. (2012), Lee et al. (2010), Park et al. (2002), Outreville (1990).
 
4
The importance of insurance market business is not only limited to risk absorption, allocation and transfer but also the mobilization of funds for use by financial markets to induce investment and growth (see, for instance, Alhassan and Fiador 2014).
 
5
Our study uses different levels of insurance market activities, both by density and premiums (see below).
 
6
Most of what we have learned relates to banking systems and securities markets, with insurance receiving only a passing review. Nevertheless, while insurance, banking and securities markets are interrelated, insurance market satisfy or perform somewhat different economic functions than do other financial services and in turn require particular conditions to succeed and to make a full economic contribution (Brainard 2008).
 
7
For more details, please see Arena (2008) and Pagano (1993).
 
8
Beck and Demirguc-Kunt (2009) find that life and non-life insurance penetration increases with the income level of the country. This trend is much stronger with life insurance as it is more income elastic than non-life (business) insurance. Hence, a consideration of financial depth of a nation is likely an important consideration for research.
 
9
Outreville (2013) summarizes the macroeconomic factors that drive the insurance market; they include economic factors, demographic factors, social and cultural factors, and institutional and market structure factors. However, our study is mostly restricted to economic and institutional and market structure factors. Specifically, we include the three specific factors: economic growth, financial depth and government consumption expenditure. The inclusion of these three factors is mostly due to their relative importance in our selected countries.
 
10
We cover two different aspects of insurance market activities: insurance penetration and insurance density, both for life and non-life. The choice of these two broad insurance indicators is determined by the following factors: broad coverage of this sector, data availability and previous use in various studies. It should be noted that there are likely to be different effects on economic growth from life and non-life insurance markets given that these two types of insurance indicators protect households and corporations from different kinds of risk (Liu et al. 2014b).
 
11
A detailed description of the construction of a composite index such as this, using principal component analysis, is available in Pradhan et al. (2014a).
 
12
MACED are used to denote financial depth and government consumption expenditure.
 
13
Various studies have paid attention to the linkage between insurance activity and economic growth, along with many different econometric models. However, there are a variety of conflicting results among the studies (see, for instance, Lee et al. 2013a, b; Pradhan et al. 2015b). The present study aims to add clarity to these conflicting results.
 
14
The samples were selected on the basis of the data available for insurance market activities, economic growth, financial depth and government consumption expenditure, consistently for all countries over the time period from 1980 to 2012.
 
15
The geographic coverage of these studies is limited to richer countries or regions such as the USA, Germany, France, Switzerland, Japan and the OECD group of countries (Eling and Luhnen 2010). See also the next footnote.
 
16
To our knowledge, there are only two studies in the context of countries with low incomes: Alhassan and Fiador (2014) for Ghana and Pan et al. (2012)for China. The latter justifies the importance of the insurance market activities and its link to economic growth in the low- and middle- income provinces of China. See also Pradhan et al. (2016) for a panel study of ARF countries.
 
17
INSAC is used for LINSD, NINSD, TINSD, LINSP, NINSP, TINSP and INSCO (see Table 2 for a summary of these variables).
 
18
Broad money supply is used as a proxy for financial depth.
 
19
The estimation process follows Arellano and Bond (1991) and Holtz-Eakin et al. (1988).
 
20
As commented earlier, insurance market activities are LINSD, NINSD, TINSD, LINSP, NINSP, TINSP and INSCO, used one at a time (see Table 2).
 
21
See the estimated coefficients of the ECTs in the first row of each of the seven different models.
 
22
VECM is referred to as vector error-correction modeling.
 
23
Macroeconomic determinants refer to both financial depth and government consumption expenditure.
 
24
The supply-leading hypothesis contends that insurance market activities are a necessary precondition for economic growth, but economic growth is not a necessary precondition for insurance market activities.
 
25
These include real interest rate, anticipated inflation, life expectancy, population growth, dependency ratio, trade openness, saving rate, black market premium and social security measures (see, for instance, Azman-Saini and Smith 2011; Chen et al. 2012).
 
26
The two unique findings are: their direct unidirectional causality to economic growth and indirect bidirectional causality to both insurance market activities and its counterpart (financial depth/ government consumption expenditure).
 
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Metadata
Title
Insurance–growth nexus and macroeconomic determinants: evidence from middle-income countries
Authors
Rudra P. Pradhan
Mak B. Arvin
Sahar Bahmani
Sara E. Bennett
John H. Hall
Publication date
07-07-2016
Publisher
Springer Berlin Heidelberg
Published in
Empirical Economics / Issue 4/2017
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI
https://doi.org/10.1007/s00181-016-1111-7

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