Insurance penetration and economic growth nexus: Cross-country evidence from ASEAN
Graphical abstract
Note 1: GDP is the per capita economic growth rate; BRM is broad money; SMC is stock market capitalization; and INS is insurance market penetration (various measures, as per text: LIP, NIP, or TIP).
Note 2: LIP is life insurance penetration; NIP is non-life insurance penetration; and TIP is total insurance (life and non-life) penetration.
Note 3: H1A: INS Granger-causes GDP; H1B: GDP Granger-causes INS; H2A: BRM Granger-causes GDP; H2B: GDP Granger-causes BRM; H3A: SMC Granger-causes GDP; H3B: GDP Granger-causes SMC; H4A: INS Granger-causes BRM; H4B: BRM Granger-causes INS; H5A: INS Granger-causes SMC; H5B: SMC Granger-causes INS; H6A: BRM Granger-causes SMC; and H6B: SMC Granger-causes BRM.
Note 4: Possible Granger causal relationships between any two variables are tested in the presence of the other two variables.
Introduction
A growing strand of the financial economics literature shows the transition to high and sustained economic growth is preceded by the emergence of modern flexible financial systems, a process called ‘financial diffusion.’ So, well-managed public finances, a stable money supply, central banks, banking systems, securities markets and sound insurance markets causally predate economic development. And the studies show that financial diffusion is important even in small economies; that financial development fosters development by mobilizing savings, mitigating risks and helping to evolve legal and regulatory institutions (for instance, Andersson et al., 2010, Bolbol et al., 2005, Colombage, 2009). But the role of insurance markets in economic growth has been less thoroughly examined than the role of banks and stock markets (Arena, 2008, Chang et al., 2013, Lee et al., 2013a, Lee et al., 2013b, Lee et al., 2013c, Chen et al., 2013).
The importance1 of the insurance–economic growth relationship2 has been recognized in the literature (Beck and Webb, 2003, Guochen and Wei, 2012, Lee et al., 2013a, Lee et al., 2013b, Lee et al., 2013c). Insurance contributes3 to the economy in many ways, both directly and indirectly, to sustain high economic growth. Hence, insurance,4 like other financial services, has grown significantly in importance in ensuring sustainable economic growth (Holsboer, 1999).
Recent studies document positive relationships between insurance penetration and economic growth (for instance, Ward and Zurbruegg, 2000) but neglect the direction(s) of causality. Thus, our challenge here is to advance the research beyond documenting correlations to examining the causal relationship between the development of the insurance industry and economic growth (for instance, Lee et al., 2013a, Lee et al., 2013b, Lee et al., 2013c). Causality may run adversely: insurance penetration may simply be an outcome of economic growth (for instance, Beck and Webb, 2003, Catalan et al., 2000). Those prior studies that do study causality tend to use only a bivariate framework with narrow coverage (for instance, Chang et al., 2013). A multivariate framework is essential for causality analysis between insurance-growth relationships. Some use panel data, involving many countries over time. Some examine the link between insurance markets and other economic growth, banks and stock markets, but few papers concentrate on the causal link(s) between these variables.5
Here we investigate whether there are demonstrable Granger causal relationships6 between insurance penetration, banking intensity, stock market depth, and economic growth, using a panel dataset covering the Association of Southeast Asian Nations (ASEAN) Regional Forum (ARF) countries7 for the 1988–2012 period. Evidently, increased banking activities foster insurance activities. Analogously, insurance penetration requires the development in stock markets for the placement of funds deposited with insurance intermediaries. The direction of causality between these variables in a multivariate framework invites rigorous investigation.
Our multivariate panel-data estimation procedure offers robust estimates by using variations between countries, as well as variations over time. We adopt a sample of countries that have hitherto received little attention; and we use more advanced econometric techniques than have previously been used in this literature, to establish whether there are causal links between the variables. We comment on the direction of the causal nexus between insurance penetration and economic growth. We make a contribution to the literature by determining the direction of causality between any two variables in the presence of the other two variables.
The remainder of this paper is organized as follows: Section 2 provides an overview of insurance markets in the ASEAN countries; Section 3 presents a summary of the prior literature; Section 4 describes our sample, variables, and data; Section 5 describes our econometric estimation strategy and presents the results; and the final section concludes with policy implications and recommendations.
Section snippets
An overview of the development of insurance markets in ASEAN countries
ASEAN has ten member countries, namely Brunei Darulssalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand and Vietnam and a population of 600 million people. ASEAN has experienced rapid economic development, with a total income level of close to USD 2.4 trillion (Lim, 2014). The further integration of these ten economies and the implementation of the ASEAN Free Trade Agreements (FTAs) is expected increase regional income and trade by 5% and 11.6%,
Literature review
A summary of studies establishing causal links between financial development (defined as broad money supply or stock market capitalization) and economic growth is given in Table 1. The key relationships between these variables are discussed below.
The first is the supply-leading hypothesis (SLH), which suggests that the development of an insurance sector is a necessary pre-condition for economic growth. Here, the causality runs from development of the insurance sector to economic growth. The
Data and the empirical model
Data on the ARF economies for 1988–2012 are obtained from the World Development Indicators published by the World Bank and Sigma Economic Research & Consulting, Switzerland. Although the ARF, in origin, consists of 25 countries, plus the European Union, we focus on only 18 member nations for our analysis. This is due to lack of adequate time series data on the remaining seven countries The 18 countries included in this study are Australia, Bangladesh, Canada, China, India, Indonesia, Japan, the
Econometric methodology and empirical results
Our specific interest is to detect causal links between economic growth and insurance penetration in the presence of banking sector depth and stock market depth. We conduct two tests: a panel cointegration test and a panel Granger causality test.
Before conducting either test, an essential first step is to identify the stationarity properties of the variables through other tests. This step is necessary because cointegration and causality tests both require variables to be stationary. There are
Conclusion and policy implications
Prior research on the relationships between economic growth, insurance penetration, banking intensity, and the intensity of the stock market tend to focus on the correlations between these variables. Those few studies that consider causality among the variables use a bivariate framework with a narrow coverage. Our study adopts a multivariate, rather than bivariate, framework, testing causality among all four variables simultaneously. In previous studies the role of other variables operating
References (53)
- et al.
Insurance-growth nexus in Ghana: an autoregressive distributed lag cointegration approach
Rev. Dev. Financ.
(2014) - et al.
Financial development, structure, and economic growth: the case of Egypt, 1974–2002
Res. Int. Bus. Financ.
(2005) - et al.
The direction of causality between financial development and economic growth
J. Dev. Econ.
(2003) - et al.
Does globalization affect the insurance markets? Bootstrap panel Granger causality test
Econ. Model.
(2013) - et al.
The relationship between globalization and insurance activities: a panel data analysis
Jpn. World Econ.
(2013) - et al.
Financial market development and the effectiveness of R&D investment: evidence from developed and emerging countries
Res. Int. Bus. Financ.
(2012) Financial markets and economic performances: empirical evidence from five industrialized economies
Res. Int. Bus. Financ.
(2009)- et al.
Stock market development and economic growth: evidence from seven Sub-Saharan African countries
J. Econ. Bus.
(2009) - et al.
Economic growth and financial development in Asian countries: a bootstrap panel Granger causality analysis
Econ. Model.
(2013) - et al.
Testing for unit roots in heterogeneous panels
J. Econom.
(2003)
The link between life insurance activities and economic growth: some new evidence
J. Int. Money Financ.
The dynamic interactions among the stock, bond and insurance markets
N. Am. J. Econ. Financ.
The linkage between insurance activity and banking credit: some evidence from dynamic analysis
N. Am. J. Econ. Financ.
On the mechanics of economic development
J. Monet. Econ.
Finance and growth: time series evidence on causality
J. Financ. Stab.
Insurance development and the finance-growth nexus: evidence from 34 OECD countries
J. Multinatl. Financ. Manag.
Banks, stock markets, and China's ‘great leap forward’
Emerg. Mark. Rev.
Financial development and economic growth: another look at the evidence from developing countries
Rev. Financ. Econ.
Life insurance and income growth: the case of Sweden 1830–1950
Scand. Econ. Hist. Rev.
Does insurance market activity promote economic growth? A cross country study for industrialized and developing countries
J. Risk Insur.
Economic, demographic, and institutional determinants of life insurance consumption across countries
World Bank Econ. Rev.
The determination of life premiums: an international cross-section analysis 1970-1981
Insur. Math. Econ.
The local power of some unit root tests for panel data
Contractual savings or stock market development: which leads? Policy Research Paper, No. 2421
Non-linearity between life insurance and economic development: a revisited approach
Geneva Risk Insur. Rev.
Does insurance activity promote economic growth? Further evidence based on bootstrap panel Granger causality test
Eur. J. Financ.
Cited by (50)
Do Muslim economies need insurance to grow? Answer from rigorous empirical evidence
2023, Quarterly Review of Economics and FinanceCitation Excerpt :They used ARDL approach to cointegration on data from 1990 to 2010 for Algeria, Gabon, Kenya, Madagascar, Mauritius, Morocco, Nigeria and South Africa. Pradhan et al. (2016) investigated causality between insurance market penetration, broad money, stock-market capitalization, and economic growth for ASEAN region for time span of 1988−2012. They found the presence of cointegration and a network of causal connections, characterized by short-run bidirectional causal relationship between insurance market penetration and economic growth.
Impact of interest rates on the life insurance market development: Cross-country evidence
2021, Research in International Business and FinanceCitation Excerpt :The global development of the insurance market impacts economic growth and progress in the financial market (Ward and Zurbruegg, 2000; Beck and Webb, 2003; Andersson et al., 2010; Pradhan et al., 2015, 2016; Olasehinde-Williams and Balcilar, 2020).
Insurance and geopolitical risk: Fresh empirical evidence
2021, Quarterly Review of Economics and FinanceConceptualizing an integrated framework for natural hazards, insurance, and poverty nexus
2021, Disaster Resilience and Sustainability: Adaptation for Sustainable DevelopmentUnveiling the causal relationships among banking competition, stock and insurance market development, and economic growth in Europe
2020, Structural Change and Economic Dynamics