Insurance development and the finance-growth nexus: Evidence from 34 OECD countries
Introduction
Economic theory and empirical evidence have confirmed for over a century that technological development and investment can foster the economic growth. (A pertinent recent survey of such studies is found in Horng et al., 2012.) The more contemporary studies of this vital subject indicate that it is financial development3 specifically that has the considerable potential for disseminating positive externalities throughout the economies that experience it, fostering even greater economic growth (see, for instance, Andersson et al., 2010, Levine, 1999, Levine, 2005, Beck and Levine, 2004, Ward and Zurbruegg, 2002, Beck et al., 2000, Levine et al., 2000, Rousseau and Wachtel, 2000, Levine and Zervos, 1998, Barro and Sala-i-Martin, 1995). Accordingly, the nexus between financial development4 and economic growth is one of the most vibrant research works in development economics, particularly since seminar works of Schumpeter (1911). The finance-growth relationship then becomes important for two specific reasons. First, governments can properly formulate growth-enhancing financial policy. If we can affirm and quantify any causality between financial development and economic growth, then any policies designed to increase/decrease financial flows within an economy would impact on economic growth. Second, these findings can enhance debates on any causal nexus between financial development and economic growth themselves.
Recent5 theoretical and empirical approaches, as articulated by Horng et al. (2012), Levine (2005), Beck et al. (2000), King and Levine (1993a), Robinson (1952), and others, have examined causal relationships between financial development and economic growth. They maintain that financial development is central to fostering long-run economic growth as it facilitates the efficient inter-temporal allocation of resources, capital accumulation, and technological diffusion. This notion supports a “supply-leading hypothesis.” The rival “demand-following hypothesis” states that it is the economic growth that determines financial development. In reality, while financial development may lead to economic growth, the latter may itself lead to further financial development.6
Financial development, which encompasses both banking-sector and stock market developments, can also be linked to insurance-market development (see, for instance, Horng et al., 2012, Ching et al., 2010, Outreville, 1990). Like banks and stock markets development, insurance market development also plays a vital role in generating economic growth (Cristea et al., 2014, Liu and Lee, 2014, Lee et al., 2013a, Lee et al., 2013b, Chang et al., 2013a, Han et al., 2010, Lee et al., 2012, Pan et al., 2012, Hou et al., 2012, Lee, 2011, Lee et al., 2010, Jawadi et al., 2009, Brainard, 2008, Webb et al., 2005, D’Arcy and Gorvett, 2004, Park et al., 2002, Ward and Zurbruegg, 2000, Holsboer, 1999). The importance of the insurance-growth relationship has risen in recent decades because of the greater prominence of insurance within the financial sector (Lee et al., 2013a, Lee et al., 2013b, Outreville, 1991).
Linkages formed in theory between insurance market development and both financial development and economic growth are well-summarized in a number of studies (see, for instance, Cristea et al., 2014, Lee et al., 2013a, Lee et al., 2013b, Horng et al., 2012, Chen et al., 2012, Chang and Lee, 2012, Ward and Zurbruegg, 2000, Brainard, 2008, Outreville, 1996). Some such studies have documented the specific contributions of insurance-market development to the economic growth7 process as well as to the well-being of the poor (see, for example, Lee, 2013, Lee and Chiu, 2012, Erik et al., 2011, Arena, 2008, Vadlamannati, 2008, Skipper, 2001).
Although several papers have considered the causal nexus between different measures of financial development8 and economic growth, or between different measures of insurance-market development and economic growth,9 we bring together these two empirical strands of literature by considering the causal link between all three variables.10 Accordingly, the causal link between any of these two variables is considered in the presence of the third variable in our study. During the course of our empirical investigation we also examine and reveal the nature of possible causal linkages between insurance sector development and financial development.11 In contrast to earlier research in this area, we utilize six12 different measures of insurance market development individually as well as a composite index13 of financial development. Finally, and contrary to all previous work in this area, our paper focuses on the links between the variables identified by using panel cointegration and causality tests applied to a sample of OECD14 countries over the period 1988–2012. Our novel panel-data estimation method allows for more robust estimates by utilizing variations between countries as well as variations over time.
The remainder of this paper is organized as follows. Section 2 provides an overview of three strands of literature, one which examines the relationship between financial development and economic growth, one that focuses on the relationship between insurance market development and economic growth, and the last which scrutinizes the relationship between insurance market development and financial development. Section 3 explains the model and data. Section 4 presents our estimation strategy and this is followed by a section describing the results. The final section contains a summary and the policy implications of our results.
Section snippets
Overview of the literature
The proposition that financial development15 is a vital determinant of economic growth is explored in Pradhan et al. (2014a), Beck and Levine (2004), Calderon and Liu (2003), Graff (2003), and Levine (1997). This body of the literature focuses on a possible link between insurance market development and economic growth (see, for instance, Cristea et al., 2014, Ward
Data, variables, and model
Annual data for the 34 OECD countries spanning over 1988–2012 were obtained from the World Development Indicators published by the World Bank and Sigma Economic Research & Consulting, Switzerland.16
Estimation strategy and empirical results
We test the following three general hypotheses:
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FID Granger-causes economic growth and vice versa.
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IMD Granger-causes economic growth and vice versa.
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FID Granger-causes IMD and vice versa.
More specifically, we test the followings sub-hypotheses:
H1A,B: Life insurance density Granger-causes economic growth and vice versa.
H2A,B: Life insurance density Granger-causes financial development and vice versa.
H3A,B: Non- life insurance density Granger-causes economic growth and vice versa.
H4A,B: Non- life
Conclusion and policy implications
This paper investigated causal relationships between insurance market development, financial development, and economic growth for an important spectrum of the world economy. Using panel data relating to selected major OECD countries from 1988 to 2012, we found that insurance market development, financial development, and economic growth are cointegrated. Panel Granger causality tests further confirmed that insurance market development specifically and financial market development overall seem
Acknowledgment
We thank the Editor and an anonymous referee for their comments and suggestions.
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2021, Research in International Business and FinanceCitation Excerpt :However, the insurance industry has idiosyncratic features that are not clearly explored. Our study contributes to understanding the extent to which the insurance market could impact and be impacted by financial and economic conditions (Azman-Saini and Smith, 2011; Pradhan et al., 2015, 2016). This work does not aim to explain the relationship between supply and demand for insurance, although several authors highlight that the macroeconomic, demographic, social, and institutional aspects can influence consumers’ behavior and also firms’ willingness to operate in certain segments (Beenstock et al., 1986; Beck and Webb, 2003; Li et al., 2007; Dragos, 2014).
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