Global Journal of Management and Business Studies.

ISSN 2248-9878 Volume 3, Number 4 (2013), pp. 413-422

Research India Publications
http://www.ripublication.com/gjmbs.htm

The Relationship between Life Insurance and

Economic Growth: Evidence from India
Anju Verma* and Renu Bala**
*Haryana School of Business, Guru Janbheshwer
University of Science and Technology, Hisar.
**Haryana School of Business, Guru Janbheshwer
University of Science and Technology, Hisar.

Abstract
This study examines the relationship between the life insurance and
economic growth in India. The total life insurance premium (TLIP),
and total life insurance investment (TLII), are used as proxy for life
insurance and Gross Domestic Product (GDP) is used for the economic
growth. The data has been compiled from the Handbook on Indian
Insurance Statistics, IRDA annual reports and economic survey for the
time period 1990-91 to 2010-11. The Ordinary Least Square regression
model has been used for data analysis. The Breusch-Godfrey Serial
Correlation LM, Heteroskedasticity: Breusch-Pagan-Godfey, JarqueBera, Collinearity Diagnoses tests have also applied to check
robustness of the OLS regression model. The Major findings of the
study are that life insurance significantly influences the economic
growth in India.
JEL Classification: G22, G23, E01, C01.
Keywords: India, Life Insurance Premium, Investment, GDP, and
OLS.

1. Introduction
A life insurer at the event of un-timely policyholders death provides the fast recovery
of family members against financial crisis in return of a fee which is called premium
(Spencer and Heppen, 1969; Ranade and Ahuja, 1999; Fabozzi, 2006; Pandey and

414

Anju Verma & Renu Bala

Manocha, 2011). Apart from providing protection an insurer can affect the economic
growth in the form of financial intermediary (Curak, et al., 2009). The rapid growth of
life insurance premium not only increases the role of a life insurer as risk provider, but
also increases it importance as institutional investor (Lee, et al., 2013). The function of
financial intermediation of life insurance is relatively more prominent than that of nonlife insurance (Chang, et al, 2013). The life insurance sector is the largest long-term
investor in Indian economy (Kallinath, 2003; Rangarajan, 2006). There is a good
theoretical justification that insurance sector influences economic growth and vice
versa (Haiss and Sumegi, 2008 p.425). As far as, Indian economy is concerned, the
contribution of insurance in GDP has increased (Parekh & Banerjee, 2010). Thus, the
present study is an effort to investigate the statistical significance of the life insurance
in economic growth of India.
The rest of the study is organized in following sections: section 2 describes the
review of literature. Section 3 presents the need of study, and section 4 explains the
objective of the study. Section 5 describes the methodology. Section 6 covers the
empirical results and interpretation. Section 7 concludes the study.

2. Review of Literature
Ward and Zurbruegg (2000) examined the relationship between GDP and insurance
growth. With, the data set of 9-OECD countries, and these countries were Australia,
Austria, Canada, France, Italy, Japan, Switzerland, UK and US. It was found that
insurance premium was Granger Cause of GDP in some countries but for some
countries it was not true. Muthusamy and Meera (2008) demonstrated the important
role of Indian life insurance sector in economic development. Parekh and Banerjee
(2010) reviewed that in India insurance sector has had significant impact on the
economic development. This sector is gradually increasing and its contribution in GDP
is also increasing. Han, et al. (2010) investigated the relationship between insurance
development and economic growth, using the data set of 77 countries. It was found
that insurance density impact plays very important role in developing countries rather
than developed ones. Ching, et al. (2011) analyzed the existence of causal relationship
between total assets of general insurance sector and GDP in Malaysia. It was found
that the long-run relationship exists between the total assets of general insurance and
GDP. And in the short-run causal relationship was absent (in both directions). Michael,
Ojo (2012) examined the short and long run relationships between GDP and insurance
sector growth of Nigeria. It was found that insurance sector growth positively and
significantly affect the GDP. The long run relationship between the insurance growth
and GDP was also confirmed. Hou, et al. (2012) investigated the impact of financial
institutions and GDP in 12 Euro-countries. Two major conclusions were found: first it
was from cross-country evidences that life insurance penetration and banking
development do not have any significant impact on GDP. Secondly, the life insurance
and banking development are significant predictors of GDP. Horng, et al. (2012)
examined the relationship among the insurance demand, financial development and

The Relationship between Life Insurance and Economic Growth: Evidence

415

GDP of Taiwan. It was found that there was an equilibrium relationship between the
insurance demand, financial development and GDP. The study found that in short run,
GDP was Granger cause of insurance demand and financial development was Granger
cause of GDP. It was finally concluded that financial development promotes GDP and
GDP further promotes the insurance demand. Lee, et al. (2013) analyzed the long term
and short term relationship between the GDP and real life insurance premium of 41
countries. It was found that in the long term one unit increment in the real life premium
will raise the GDP by 0.06 units. The life insurance markets development determines
the economic growth in the long-run and in the short term, bidirectional causalities
were found between them. Chang, et al. (2013) investigated the causal relationship
between the insurance activities and GDP, using a data set of 10 OECD countries. It
was found that there was a significant and positive relationship between the overall
insurance growth and economic growth for 5 countries out of 10 OECD countries.

3. Need of the Study

The role of insurance sector in economic growth has hardly been investigated
empirically in literature as compared to banking sector and stock markets (Arena,
2006; Chang, et al., 2013). The worldwide growth of insurance and its influence on the
government action is a clear indication of its importance in Indian economy too
(Mohananasundari and Balanagagurunathan, 2011). This fact prompts us to examine
this issue empirically in India.

4. Objective of the Study

To examine the significant relationship between the life insurance and GDP in India.

5. Methodology
Hypothesis: There is no significant relationship between the life insurance and GDP in
India.
The data: This study is empirical by nature as is based on secondary data. That has
been compiled from the Handbook on Indian Insurance Statistics, IRDA annual reports
and economic survey.
Variables Definition: the variable GDP as proxy for economic growth is taken as
dependent variable. The independent variables of the study are total life insurance
premium (TLIP), total life insurance investment (TLII), covering the time period from
1990-91 to 2010-11.
Model: the OLS regression model has been taken as statistical tool for data analysis
(Browne and Kim, 1993; Michael, 2012). In order to check the efficiency and
unbiasedness of the estimated coefficients of the OLS regression model the following
tests has been applied: The Breusch-Godfrey Serial Correlation LM test,
Heteroskedasticity test: Breusch-Pagan-Godfey, Jarque-Bera, Collinearity Diagnoses

416

Anju Verma & Renu Bala

tests. All the variables (TLIP, TLII and GDP) of the study are transformed by taking
first difference for reducing the problem of serial correlation, heteroscedasticity and
multicollinarity.

6. Empirical Results and Interpretation

Table 1: OLS Regression Model.
Dependent Variable: D(GDP)
Method: Least Squares
Date: 08/27/13
Sample (adjusted): 2 21
Included observations: 20 after adjustments

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
D(TLII)
D(TLIP)

85819.84
0.571622
3.437962

12634.13
0.204770
1.046105

6.792701
2.791529
3.286442

0.0000
0.0125
0.0044

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.861001
0.844648
40937.95
2.85E+10
-239.1498
52.65154
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

175106.9
103864.7
24.21498
24.36434
24.24414
1.860152

Table 1 presents the OLS regression results and these results are substantially
similar as was expected. A significant impact of life insurance on economic growth is
observed in India. It is found that if the life insurance investment increases by one unit
holding the other things constant then on the average GDP increases by (0.57), and it is
statistically significant at 5% level. The life insurance premium increases by one unit
then on the average GDP increases by (3.43) holding other things constant. It
influences significantly to the GDP at 1% level.

The Relationship between Life Insurance and Economic Growth: Evidence

417

Tables 1-5 present the robustness of the OLS regression model. The R-square and
adjusted R-square of the model are (0.86 and 0.85), respectively more than (0.60). The
F-statistic significance is a good indicator of the overall significance of the model. The
Durbin Watson is (1.86), which is near about (2), it makes clear that the residuals are
not serially correlated. Again we are selecting the JB (Jarque-Bera) test, which is based
on OLS residuals. To compute the Jarque-Bera test the Skewness and Kurtosis, and the
OLS residuals has to compute first. It has the following statistic:
JB n
H : Residuals are normally distributed, which is tested with associated P-value. If
the P-value is reasonably high then a researcher does not reject the normality
assumption (Gujarati, 1995). The p-value is (0.95) the null hypothesis has accepted
that residuals are normally distributed.
7

Series: Residuals
Sample 2 21
Observations 20

6
5
4
3
2
1
0
-100000

-50000

50000

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

-7.64e-12
3374.814
80569.49
-75300.47
38723.43
0.010837
2.644649

Jarque-Bera
Probability

0.105620
0.948560

100000

Table 2: Breusch-Godfrey Serial Correlation LM Test.

F-statistic
Obs*R-squared

0.076916
0.203026

Prob. F(2,15)
0.9263
Prob. Chi-Square(2) 0.9035

Note: H0: There is no serial correlation.

Table 3: Heteroskedasticity Test: Breusch-Pagan-Godfey.

F-statistic
0.262967
Obs*R-squared
0.600179
Scaled explained SS 0.356584
H0: The residuals are homoscedastic.

Prob. F(2,17)
Prob. Chi-Square(2)
Prob. Chi-Square(2)

0.7718
0.7408
0.8367

418

Anju Verma & Renu Bala

Table 3 exhibits that the null hypothesis of homoscedasticity has been accepted.
The Breusch-Pagan-Godfrey test makes clear that the residuals of the model are free
from heteroscedasticity. The coefficient estimates of the OLS regression model are
efficient.

Table 4: Collinearity Statistcs.

Coefficientsa
Model
Unstandardized
Standardized
t
Coefficients
Coefficients
B
Std. Error
Beta
1 (Constant) 85819.820 12634.124
6.793
TLII
.572
.205
.446
2.792
TLIP
3.438
1.046
.525
3.286
a. Dependent Variable: GDP

Sig.

.000
.013
.004

Collinearity
Statistics
Tolerance VIF
.320
.320

3.123
3.123

Here is rule of thumb if the Variance Inflation Factor of a variable exceeds 10 than
that variable is said to be highly collinear (see Gujarati, 1995). Table-4 exhibits that
Variance Inflation Factor of both variables as follows: (3.1 and 3.1) it means the
problem of highly co linearity does not exist in among the variables. The, tolerance is
(0.32 and 0.32).

Table 5: Collinearity Diagnostics.

Model

Dimension

Eigenvalue Condition
Variance Proportions
Index
(Constant) TLII TLIP
dimension0 1 dimension1 1
2.503
1.000
.06
.03
.02
2
.400
2.501
.94
.07
.05
3
.096
5.100
.00
.90
.92
a. Dependent Variable: GDP
Here is rule of thumb that if Conditional Index is between 10 and 30 there is
moderate to strong multicollinearity (see Gujarati, 1995).
CI

Maximum eigenvalue
Minimum eigenvalue

The table-5 describes that Conditional Index is (1.0, 2.05 and 5.1), and it makes
clear that the regression model is free from severe multicollinearity problem. In
summing up it is concluded that all these above mentioned tests confirmed that the

The Relationship between Life Insurance and Economic Growth: Evidence

419

estimated coefficients of the OLS regression model are the best, linear, efficient and
unbiased.

Conclusions
These results provide empirical evidence that life insurance has both positive as well as
significant impact on the economic growth in India. The null hypothesis has been
rejected. In current scenario, India has huge insurable population, is good hope for life
insurance sector. Scope for further studies: Further research work need to be done in
the same direction by applying different time period and different methodologies such
as simultaneous equation model, Vector auto-regression, Granger causality and
cointegration. The results may be more interesting than current study.

References
[1]

Arena, M. (2006). Does Insurance Market Activity Promote Economic

Growth? A Cross-Country Study for Industrialized and Developing Countries.
World Bank Policy Research Working Paper, 1-21.
[2] Browne, M. J., & Kim, K. (1993). An International Analysis of Life Insurance
Demand. The Journal of Risk and Insurance, 60(4), 616-634.
[3] Chang, T., Lee, Chien-Chiang, & Chang, Chi-Hung (2013). Does Insurance
Activity Promote Economic Growth? Further Evidence Based on Bootstrap
Panel Granger Causality Test. The European Journal of Finance, 1-24.
[4] Ching, K. S., Kogid, M., & Mulok, D. (2011). Insurance Funds and Economic
Growth in Malaysia: Future Empirical Evidence. Interdisciplinary Review of
Economics and Management, 1(1), 1-9.
[5] Curak, M., Loncar, S., & Poposki, K. (2009). Insurance Sector Development
and Economic Growth in Transition Countries. International Research
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[6] Fabozzi, F. J., Modigliani, F., Jones, F. J., & Ferri, M. G. (2006). Insurance
Companies. Foundations of Financial Markets and Institutes (3rd ed. Chap.7).
Pearson Education Publication.
[7] Gujarati, D. N. (1995). Basic Econometrics (3rd ed.). Tata McGraw-Hill,
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[8] Haiss, P., & Sumegi, K. (2008). The Relationship between Insurance and
Economic Growth in Europe: A Theoretical and Empirical Analysis.
Empirica, 35, 405-431.
[9] Han, L., Li, D., Moshirian, F., & Tian, Y. (2010). Insurance Development and
Economic Growth. The Geneva Studys on Risk and Insurance-Issue and
Practice, 35, 183-199.
[10] Holyoake, J., & Weipers, W. (2002). Insurance (4th ed.). Delhi: A. I. T. B. S.
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[11] Horng, M. S., Chang, Y. W., & Wu, T. Y. (2012). Does Insurance Demand or
Financial Development Promote Economic Growth? Evidence from Taiwan.
Applied Economics Letters, 19(2), 105-111.
[12] Hou, H., Cheng, Su-Yin, & Yu, Chin-Ping (2012). Life Insurance and Euro
Zones Economic Growth. Procedia-Social and Behavioral Sciences, 57, 126131.
[13] Kallinath, S. P. (2003). Life Insurance Corporation of India, Its Products and
Their Performance Evaluation: A Special Reference to Gulbarga District.
Finance India, 17(3), 1037-1040.
[14] Koutsoyiannis, A. (1997). Theory of Econometrics (2nd ed.). New York:
Palgrave, Publication.
[15] Lee, Chien-Chiang, Lee, Chi-Chuan, & Chiu, Yi-Bin (2013). The Link
between Life Insurance Activities and Economic Growth: Some New
Evidences. Journal of International Money and Finance, 32, 405-427.
[16] Michael Ojo, O. (2012). Insurance Sector Development and Economic Growth
in Nigeria. African Journal of Business Management, 6(23), 7016-7023.
[17] Mohanasundari, M., & Balangagurunathan, S. (2011). The Phase and Changes
of Insurance Industry in India. European Journal of Social Sciences, 24(4),
553-564.
[18] Muthusamy, A., & Meera, A. (2008). Winds of Changing Mark Life Insurance
Market in India. Karaidui: Alagappa University. Retrieved from
http://ffymag.com/admin/issuepdf/Pvt%20Life%20Insurance.pdf.
[19] Pandey, A., & Manocha, S. (2011). A Study of Life Insurance Products:
Innovative Distribution Channels. The Journal of Indian Management and
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[20] Parekh, A., & Banerjee, C. (2010, September). Indian Insurance SectorStepping into the Next Decade of Growth. Retrieved from
http://mycii.in/KmResourceApplication/E000000073.2466.Indian%20insuran
ce%20report%20final.pdf.
[21] Ranade, A., & Ahuja, R. (1999). Life Insurance in India: Emerging Issues.
Money Banking and Finance, 34(), 203-212.
[22] Rangarajan, C. (2006, July 27). The Widening Scope of Insurance.
Convocation Address at the Institute of Insurance and Risk Management.
[23] Spencer, R. W., & Heppen, M. J. (1969). Impact on Life Insurance Companies
of Changing Economic Conditions. Financial Analysts Journal, 25(4), 73-79.

Date: 08/27/13 Time: 03:52

Sample: 2 21
Included observations: 20
Autocorrelation
Partial Correlation
. *| . |
. *| . |
. | . |
. | . |

1
2

AC
PAC
-0.079 -0.079
-0.016 -0.022

Q-Stat
0.1436
0.1495

Prob
0.705
0.928

The Relationship between Life Insurance and Economic Growth: Evidence

. | .
.**| .
. *| .
. | .
. | .
. | .
. |**.
. | .
. | .
. | .

. | . |
3 0.006 0.003
.**| . |
4 -0.340 -0.342
. *| . |
5 -0.076 -0.148
. | . |
6 0.036 -0.002
. | . |
7 0.041 0.039
. *| . |
8 -0.033 -0.167
. |**. |
9 0.283 0.224
. | . |
10 -0.018 0.043
. |* . |
11 0.037 0.097
. *| . |
12 -0.017 -0.067
Descriptive Statistics
Mean
Std. Deviation
175106.9000
1.03865E5
70182.2600
81049.72158
14301.9050
15865.11363

|
|
|
|
|
|
|
|
|

GDP
TLII
TLIP

Pearson Correlation

Sig. (1-tailed)

Model
dimension0

Correlations
GDP
GDP
1.000
TLII
.879
TLIP
.893
GDP
.
TLII
.000
TLIP
.000
GDP
20
TLII
20
TLIP
20

421

0.1506
3.3242
3.4947
3.5365
3.5938
3.6338
6.8362
6.8505
6.9172
6.9334

TLII
.879
1.000
.824
.000
.
.000
20
20
20

Variables Entered
Variables Removed
TLIP, TLIIa
.
a. All requested variables entered.
b. Dependent Variable: GDP

0.985
0.505
0.624
0.739
0.825
0.889
0.654
0.739
0.806
0.862

N
20
20
20

TLIP
.893
.824
1.000
.000
.000
.
20
20
20
Method
Enter

Model Summary
Model
R
R Square Adjusted R Square Std. Error of the Estimate
dimension0 1 .928a
.861
.845
40937.94626
a. Predictors: (Constant), TLIP, TLII

422

Anju Verma & Renu Bala

Model
Regression
Residual
Total

Coefficient Correlationsa
Model
TLIP
Correlations
TLIP
1.000
TLII
-.824
Covariances
TLIP
1.094
TLII
-.177
a. Dependent Variable: GDP
ANOVAb
Sum of Squares
df
Mean Square
1.765E11
2
8.824E10
2.849E10
17
1.676E9
2.050E11
19
a. Predictors: (Constant), TLIP, TLII
b. Dependent Variable: GDP

TLII
-.824
1.000
-.177
.042

F
52.652

Sig.
.000a