The Relationship Between Insurance and Economic Development: 85 Empirical Papers for a Review of the Literature

• DOI: http://doi.org/10.1111/j.1540-6296.2012.01219.x
• Author: J. François Outreville
• Published date: 01 March 2013
• Date: 01 March 2013

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2013, Vol.16, No. 1, 71-122

DOI: 10.1111/j.1540-6296.2012.01219.x

PERSPECTIVE

THE RELATIONSHIP BETWEEN INSURANCE AND ECONOMIC

DEVELOPMENT:85EMPIRICAL PAPERS FOR A REVIEW OF

THE LITERATURE

J. Franc¸ois Outreville

ABSTRACT

The objective of this article is to propose a review of 85 empirical papers ex-

amining the relationships between insurance and economic development, that

is, the insurance-growth nexus. When looking at the economic importance of

the insurance sector, most papers in the past have looked at the demand side

(the level of economic development is an explanatory variable among other

factors that affect the demand for insurance). Because the role of the insurance

sector and its contribution to development is at the agenda of international

organizations and because the importance of the relationship between financial

development and economic growth has been well recognized and emphasized

in the field of economic development, more recent papers have examined the

causality links between insurance and economic development and the role of

insurance as a significant determinant in the process of economic growth.

INTRODUCTION

Even though insurance is of primordial importance in domestic economies and interna-

tionally, its role in the development process remains difficult to assess although it has

been recognized since the early 60s by some authors.1Indeed, so important is insurance

in the trade and development matrix that, at its first session in 1964, the United Na-

tions Conference on Trade and Development (UNCTAD) formally acknowledged that

“a sound national insurance and reinsurance market is an essential characteristic of

economic growth.”2

While insurance, like other financial services, has grown in quantitative importance as

part of the general development of financial institutions, it also has become qualitatively

J. Franc¸ois Outreville works at HEC Montr ´

eal, ICER Fellow, Turin; e-mail: J-francois.

outreville@hec.ca. The author is grateful to the anonymous referees for their invaluable com-

ments and suggestions. This research has received financial support from ICER in Turin, Italy.

This article was subject to double-blind peer review.

1What Patrick (1966) emphasized about the usefulness and importance of financial development

in developing economies is borne out empirically today.

2Proceedings of the United Nations Conference on Tradeand Development (1964), Final Act and

Report, p. 55, annex A.IV.23.

71

72 RISK MANAGEMENT AND INSURANCE REVIEW

more important due to the increase of risks and uncertainties in most societies. The

economic importance of the insurance sector has been increasing as part of the liberal-

ization of financial systems (including privatization) and globalization and conglomer-

ization of financial markets and during the 1990s, the total assets of insurance companies

grew faster than the assets of banks, mainly through M&As (Das et al., 2003).

The importance of the relationship between financial development (FD) and economic

growth has been well recognized and emphasized in the field of economic development.

The pioneering work of Jung (1986), Greenwood and Jovanovic (1990), and King and

Levine (1993) and subsequent work by Levine and Zervos (1998), Rousseau and Wachtel

(1998), Levine et al. (2000), and others provide evidence on the relationship between FD

and economic growth.3

Two possible patterns may coexist in the causal relationship between FD and economic

growth (Patrick, 1966). In the first, called “demand-following,” the lack of financial

growth is a manifestation of the lack of demand for financial services. As the real side of

the economy develops, the demand for various new financial services materializes. In the

second, the “supply-leading” approach, FD causes economic growth and the expansion

of the financial system precedes the demand for its services. A third view supports the bi-

directional relationship between FD and economic growth (Demetriades and Hussein,

1996; Greenwood and Smith, 1997).4Fung (2010) studies the convergence in FD and eco-

nomic growth and reports that the convergence is strongerin the early stage of economic

development, and then diminishes as sustained economic growth gets under way.

This result is important considering the case of emerging or developing countries as

many governments have, in the past, established national financial institutions with the

view that their financial system could serve their countries’ development needs. Re-

cently,some papers, inspired by this context, have focused on the relationships between

FD, insurance development, and economic development. The role of the insurance sector

and its contribution to development is also at the agenda of international organizations

such as UNCTAD, the World Bank, and the IMF (UNCTAD, 2005a,2005b).

However, the share of total insurance premiums generated in developing countries

remains at a low figure even though these countries have more than 80 percent of the

world’s population and their share in the global economy increased from 18 to 28 percent

in the past 10 years.5Given the large variation in the role of insurance across countries,

the question of the causes of this variation, and therefore the determinants of insurance

consumption, arises (USAID, 2006). When looking at the relevant literature it is obvious

that research effort has moved onto understanding the underlying factors that affect the

demand for insurance.

Despite the potential role that the insurance sector may play for financial and economic

development, there have been few studies examining the possible interaction between

insurance and economic growth.6Moreover, the bulk of the existing empirical research

3See FitzGerald (2006) for a survey and critical view.

4There is also the view that rejects the existence of a finance–growth relationship (Lucas, 1988).

5See the World Bank data at http://data.worldbank.org/.

6When reviewing this literature, there is no clear distinction between development and growth.

Almost all papers consider GDP per capita rather than GDP growth and insurance premiums

RELATIONSHIP BETWEEN INSURANCE AND ECONOMIC DEVELOPMENT 73

focuses on the life insurance sector only. However, the importance of the insurance-

growth nexus7is a growing concern for research due to the increasing share of the

aggregate financial sector in almost every developing and developed country. Within

this research agenda, the objective is to investigate all the literature in this insurance-

growth nexus.

Previous surveys on the demand for insurance have only examined the determinants and

the impact of FD and economic growth (Ferry, 1977; Zeits, 2003; Hussels et al., 2005).8

This article contributes to this body of research by providing an extensive literature

review of all empirical studies that have looked at the demand side (economic growth

is an explanatory variable among other factors that affect the demand) but also by

including more recent studies that have examined the causality relationships between

insurance and economic growth (does insurance promote economic growth?).

Within the insurance-growth nexus, this survey identifies 85 empirical papers, most

of them examining the demand for life insurance. Only 22 papers are investigating

property–liability insurance. Among these studies, only 15 are looking at the causal-

ity links between insurance and economic growth. Most of these studies have found

evidence that insurance market development is characterized as a supply-leading phe-

nomenon. A distinction has to be made between national studies (50 papers) and cross-

country studies (35 papers dealing with OECD countries, emerging Asian countries, or

developing countries). From 2000 onward there is a surge of interest for national studies

of emerging Asian countries (10 papers).

The article is structured as follows. The “Measuring the Economic Significance of

Insurance Markets” section provides an assessment on how the relationship between

insurance and economic growth is measured and the significance of the insurance

markets. Section “The Demand for Insurance” section presents the theoretical approach

to the demand for insurance, which is the starting point for examining the list of

empirical papers looking at the determinants of the insurance sector’s development.

These are reviewed in the following section. While there is a plethora of research on the

causal relationship between bank lending and economic growth and capital markets

and economic growth, the insurance sector has not received ample attention in this

respect. The “Is There a Role for Insurance in Economic Growth?” section presents

the state of the empirical research looking at the causality links between insurance

and economic growth. Finally, the “Concluding Remarks and Research Implications”

section summarizes the main findings and identifies the major research implications for

further research on the insurance-growth nexus.

MEASURING THE ECONOMIC SIGNIFICANCE OF INSURANCE MARKETS

In 2010, insurance companies worldwide wrote US$4,340 billion in direct premiums;

in other words, the equivalent of about 7 percent of global GDP was used to purchase

insurance products. During the same year,insurance companies in developing countries

levels rather than insurance growth. Papers examining the demand for insurance are not con-

cerned by the concept of “demand-following.” Only a few recent papers consider how insurance

and economic growth may be related.

7This term is coined by Haiss and Sumegi (2008).

8Haiss and Sumegi (2008) also provide a literature review on the insurance-growth nexus.