Insurance Development and Macroeconomic Growth: Analysis of Selected Asian Countries

Abstract

Economic growth and its sustainability has long been the focus of debate for both academic researchers and policy makers. A large number of attempts have been made to extensively list the factors that may have an impact on economic growth and the role of insurance as the factor of growth also got recognition. Insurance sector plays an important in augmenting economic growth by managing the risk involved in the investment decisions. Insurance companies mobilise savings from surplus spending units to the deficit spending units and thus, help in financing the investment in the real sector. Insurance sector also contribute to the economic growth by promoting financial stability, facilitating trade and commerce, mobilizing savings, allowing risks to be managed more efficiently, encouraging loss mitigation; and by fostering a more efficient allocation of capital. Insurance services enhance marginal productivity of capital, technological innovation and savings rate in the economy. With such significance of insurance sector in the economic growth of a country, a number of studies have been undertaken to find the causal relationship between them. However, there is no consensus among the existing studies about the causal relationship between insurance and economic growth. In this backdrop, the present study is an attempt to analyse the relationship between insurance development and macroeconomic growth in the context of 14 Asian countries in the multivariate neo-classical framework with specific research objectives like to evaluate the trend and progress of the insurance sector development in the selected Asian economies; to explore the level of disparity in the insurance sector development across selected Asian economies; to investigate the relationship between the development of life insurance sector and economic growth in the selected Asian economies; to investigate the relationship between the development of non-life insurance sector and economic growth in the selected Asian economies; to investigate the relationship between the development of insurance sector as a whole and economic growth in the selected Asian economies. ix The methodology used in this study is specified as per objectives. For the first objective, time series plots have been prepared for variables of insurance sector development and trend pattern are observed for the selected countries. For second objective, the level of disparities in the insurance sector development across the selected Asian countries is observed through the time series plots of insurance penetration and insurance density. Furthermore, the concept of Gini coefficient is used as a statistical measure of the inequality. In the presence of between-country insurance inequality, it is often asked whether such inequality would eventually converge. This issue with respect to the insurance sector development across high-income, upper-middle income and lower-middle income countries is addressed by employing the concepts of absolute β-convergence and σ-convergence tests. For objective third, fourth and fifth, the study employs the ARDL model to check the relationship between life insurance sector and economic growth, non-life insurance sector and economic growth and total insurance sector and economic growth in the selected countries. The findings of the study with respect to the first objective reveal that the life insurance sector in most of the selected Asian countries has shown much progress during the period from 1985 to 2015. However, the development in the non-life insurance sector is not satisfactory during that period. With respect to the objective second, the study reveals that the existence of wide disparity in the insurance sector development in the selected Asian countries during the period from 1985 to 2015. Between-country inequality is found in the life insurance sector development, non-life insurance sector development and also in the development of insurance sector as a whole. Further, the convergence possibility of insurance sector development between the selected Asian countries is also predicted in the findings. The findings of the study with respect to objective third, fourth and fifth reveal the existence of long-run equilibrium relationship between insurance sector development (life insurance, non-life insurance and insurance sector as whole) and economic growth for the selected Asian countries. However, there is feedback/bidirectional causal relationship between life insurance sector and economic growth and also between insurance sector as a whole and economic growth in the selected Asian countries. In the case of non-life insurance and economic growth relationship, x the findings from the study reveal unidirectional relationship from non-life insurance to economic growth. The bidirectional relationship between life insurance and economic growth and total insurance and economic growth imply that policies for increasing the penetration of the life insurance sector and insurance sector as a whole in selected Asian countries are likely to augment investment opportunities and enhance the productive capacity of the economy thereby stimulating the overall economic growth. Second, expansion in economic activities with increase in economic growth is likely to lead to the growth in penetration rate of the life insurance sector and total insurance sector in selected Asian economies. The evidence of supply-leading hypothesis from the non-life insurance and economic growth relationship implies that the policies for increasing the penetration of non-life insurance sector in selected Asian countries are likely to augment investment opportunities and enhance the productive capacity of the economy thereby, stimulating the overall economic growth. Second, expansion in economic activities with increase in economic growth fails to provide synergy for the growth in the penetration rate of the non-life insurance sector in selected Asian economies. The study suggests that appropriate policies and/or strategies should be formulated for increasing the penetration of non-life insurance sector in Asian economies. In this direction, emphasis should be given in asset/property insurance, health insurance, crop insurance etc. It is also suggested that, both life and non-life should reformulate their business models targeting “the goldpost at the bottom of the pyramid”. When the small savings of rural masses are strategically targeted and achieved, the insurance penetration will increase thereby fostering the macroeconomic growth of Asian countries. The study further suggests that emphasis should be given in the development of appropriate life insurance policies to mobilize larger resources for financing productive projects targeting higher rate of overall economic growth because bidirectional causal relationship has been observed between the development of life insurance sector and economic growth in Asian countries.