Insurance and Growth

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The Geneva Papers, 2010, 35, (183–199)
r 2010 The International Association for the Study of Insurance Economics 1018-5895/10 www.palgrave-journals.com/gpp/

Insurance Development and Economic Growth*
Liyan Hana, Donghui Lib, Fariborz Moshirianb and Yanhui Tiana a

School of Economics & Management, Beihang University, Beijing, China. School of Banking and Finance, The University of New South Wales, Sydney, Australia. E-mail: donghui@unsw.edu.au
b

This paper investigates the relationship between insurance development and economic growth by employing GMM models on a dynamic panel data set of 77 economies for the period 1994–2005. Insurance density is used to measure the development of insurance. Controlled by a simple conditioning information set and a policy information set, we can draw a conclusion that insurance development is positively correlated with economic growth. The sample is then divided into developed and developing economies. For the developing economies, the overall insurance development, life insurance and non-life insurance development play a much more important role than they do for the developed economies. The Geneva Papers (2010) 35, 183–199. doi:10.1057/gpp.2010.4 Keywords: insurance development; economic growth; dynamic panel data

Introduction
There has been a great interest in the role of financial institutions in economic growth. Economists refer to some work of researchers in the late 19th and early 20th centuries who discussed the significance of finance for economic growth. In recent times, a number of studies have analysed various issues with respect to the role of the banking sector in economic growth. The most prominent studies have been conducted by Levine and his colleagues. For instance, King and Levine1 demonstrated the connection between bank development and economic growth, which was confirmed by later studies such as Levine, Beck et al., Levine et al., Rousseau and Wachtel, and Beck and Levine.2 The studies of the relationship between financial development and economic growth have been shown to be robust using different econometric methods. For instance, Levine and Zervos3 used crosscountry regressions, whereas Levine4 used cross-country instrumental variables regressions. The recent studies by Beck et al., Levine et al., and Beck and Levine5 used dynamic panel GMM estimations, whereas Rousseau and Wachtel6 used panel Generalised Method of Moments (GMM) estimation for a Vector Autoregression (VAR) model.

* Liyan Han and Yanhui Tian are especially grateful to National Natural Science Foundation of China (No. 70831001 and No. 70821061).
1
King and Levine (1993a, b).
2
Levine (1998, 1999), Beck et al. (2000), Levine et al. (2000), Rousseau and Wachtel (2000), and Beck and Levine (2004).
3
Levine and Zervos (1998).
4
Levine (1998, 1999, 2002).
5
Beck et al. (2000), Levine et al. (2000), and Beck and Levine (2004). 6
Rousseau and Wachtel (2000).

The Geneva Papers on Risk and Insurance—Issues and Practice

184

Although comparing with studies on banks’ role in economic growth, the role of insurance is relatively less examined, there has been increasing literature on this issue recently. Insurance is of great importance to a modern society by making many economic activities possible in addition to its contributions to the economies in terms of its size, employment, managed assets, and so on.7 In fact, economic growth is characterised by the soundness of a national insurance market.8,9,10 Outreville9 emphasised on the importance of property-liability insurance and life insurance, respectively, in developing economies and their growth. Skipper10 stated that insurance contributed to the economy from the following aspects: ‘‘ y (1). Promotes financial stability and reduces anxiety; (2). Can substitute for government security programs; (3). Facilitates trade and commerce; (4). Mobilizes savings; (5). Enables risk to be managed more efficiently; (6). Encourages loss...
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