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The Relationship Between Insurance and Economic Growth in Europe: A

Theoretical and Empirical Analysis

Article  in  Empirica · February 2008

DOI: 10.1007/s10663-008-9075-2 · Source: RePEc

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Empirica
DOI 10.1007/s10663-008-9075-2

ORIGINAL PAPER

The relationship between insurance and economic

growth in Europe: a theoretical and empirical analysis

Peter Haiss Æ Kjell Sümegi

! Springer Science+Business Media, LLC. 2008

Abstract The role of insurance companies, although growing in importance in

financial intermediation, has received less attention than bank and stock markets and
if so, mainly as a provider of risk transfer in single country or very heterogeneous
samples. We investigate both the impact of insurance investment and premiums on
GDP growth in Europe. We conduct a cross-country panel data analysis from 1992
to 2005 for 29 European countries. We find a positive impact of life insurance on
GDP growth in the EU-15 countries, Switzerland, Norway and Iceland. For the New
EU Member States from Central and Eastern Europe, we find a larger impact for
liability insurance. Furthermore our findings emphasise the impact of the real
interest rate and the level of economic development on the insurance-growth nexus.
We argue that the insurance sector needs to be paid more attention in financial
sector analysis and macroeconomic policy.

Keywords Insurance ! Financial intermediation ! Economic growth !

Finance-growth nexus

The opinions expressed are the authors’ personal views and not necessarily those of the institutions the
authors are affiliated with. The authors are indebted to helpful comments from Gerhard Fink and the
Finance-Growth Nexus-Team at WU-Wien, http://www.wu-wien.ac.at/europainstitut/forschung/nexus.
We thank the editor and two anonymous reviewers for very fruitful comments. We also benefited greatly
from comments from conference participants on previous versions at the AWG, Nov. 2006, Klagenfurt;
11th Macroeconomic Analysis & International Finance Conference, Crete, May 2007; NOEG, May
2007, Klagenfurt; EFMA, June 2007, Vienna; ICCEES, Aug. 2007, Berlin; All remaining errors are, of
course, our own.

P. Haiss ! K. Sümegi (&)

Europa Institut, Vienna University of Economics and Business Administration, Althanstrasse 39-45,
1090 Vienna, Austria
e-mail: mip@ycn.com
P. Haiss
e-mail: peter.haiss@wu-wien.ac.at

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 Empirica

JEL Classification E44 ! G22 ! O11 ! O16

1 Introduction

Theoretical studies and empirical evidence have shown that countries with better
developed financial systems enjoy faster and more stable long-run growth. Well-
developed financial markets have a significant positive impact on total factor
productivity, which translates into higher long-run growth. Arena (2006) and Beck
and Levine (2004) provide recent empirical evidence for the bank/stock market-
economic growth relationship. We can show in this paper that a similar positive
relationship holds for insurance in Europe over the period from 1992 to 2005. We
contribute to the literature by distinguishing between the mature EU-15+ and
emerging CEE economies (New EU Member States and Accession Countries),
between life and liability insurance, and also between insurance as a provider of risk
transfer and as an institutional investor. For the mature EU-15+ economies
(including Switzerland, Norway and Iceland) characterised by strong life insurance
penetration, we find that insurance investment supports growth with lags. For the
emerging CEE economies, where life insurance plays a minor role, we find a larger
impact for liability insurance. We confirm that the impact of finance on growth
varies with economic development for the insurance sector.
The importance of the insurance-growth nexus is growing due to the increasing
share of the insurance sector in the aggregate financial sector in almost every
emerging and mature market economy. The total assets of insurance companies
amounted to USD 17 trillion and institutional investors managed around 44% of an
average household’s holdings in 2005. Figure 1 illustrates the parallel and rapid
growth of total insurance premiums (i.e. the increasing role of insurers as providers
of risk transfer) and of total assets relative to GDP growth. Insurance companies,
together with mutual and pension funds, are one of the biggest institutional investors
in stock, bond and real estate markets. The growing investment activities also

Fig. 1 Total insurance assets, premiums and GDP (average, Index: 2000 = 100%). Source: authors’
compilation; data source: CEA (2006)

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emphasise the possible importance of insurance companies as an institutional

investor in economic growth (Catalan et al. 2000; Rule 2001).
Literature dealing with the interaction between the financial sector and economic
growth is merely concerned with bank and stock markets. The role of the financial
sector for economic growth has become a major topic of empirical research in the
last decade or so, greatly elaborating on the seminal work of King and Levine
(1993a, b) and Rousseau and Wachtel (1998). An impressive number of empirical
studies provide evidence that both the bank sector and the stock market show an
independent, significant and positive effect on growth (see Papaioannou 2007 for a
recent review). Compared to the vast literature focusing on bank and stock markets
and their respective environments, the insurance sector has hardly been investigated
in its role vis-à-vis economic growth (Sümegi and Haiss 2008).
The few research efforts on the insurance-growth nexus, while emphasising the
importance of the topic, concentrate on single countries only (e.g. Adams et al.
2005; Kugler and Ofoghi 2005; Ranade and Ahuja 2001) or on distant time horizons
(e.g. Ward and Zurbruegg 2000), deal with specific sub sectors only (Beenstock
et al. 1988; Browne et al. 2000), are rather concerned with contagion via the
insurance sector (e.g. Das et al. 2003) or treat the insurance-growth link rather as a
side issue (e.g. Holsboer 1999). The valuable contributions by Arena (2006) and
Webb et al. (2002) both use large and regionally dispersed country samples and
have a strong focus on the interaction of the insurance sector with banking and the
stock market. Combining countries at very different levels of economic develop-
ment and with very different insurance regulations, they both find positive joint
effects of bank and life insurance, and bank, stock, life insurance and non-life
insurance respectively. With the notable exception of Catalan et al. (2000), the
effect of the insurance sector has only been tested as a provider of risk transfer
(measured through premiums) while the growing role of insurance companies as
institutional investors has received less attention.
Building on new data from the European Insurance and Reinsurance Federation
(CEA), we add to the literature by investigating both the impact of risk transfer
measured by insurance premiums (total, life and non-life) and of investment by the
insurance sector. Given the fact that regulation and regulatory differences are of
great importance for the insurance sector, and following the recommendation by
Abiad et al. (2007) and Schiavo and Vaona (2006) to study the growth process of
countries with prima facie common dynamics, we concentrate on European
countries with a similar strongly converging regulatory and competitive setting. We
investigate the impact of insurance on growth for the aggregate European Economic
Area (EEA), and separately for the ‘‘old’’ EU-15 (plus Switzerland, Norway and
Iceland, termed EU-15+) and for the New EU Member States and Accession
Countries from Central and Eastern Europe (termed CEE+). No study has yet been
conducted covering the European transition countries. As the inception of the Single
Market Project in 1992 changed the landscape of the insurance sector quite
considerably (Mahlberg and Url 2000) and due to data availability for the CEE
countries, we cover 1992–2005 for these 29 European countries.
The remainder of the paper is organised as follows. Section 2 discusses the
spheres of influence of the insurance sector within the economy. We emphasise the

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effects of the insurance sector as a provider of risk transfer (via premiums) and as an
institutional investor (via investment) while briefly discussing social and legal
aspects. Section 3 introduces the theoretical model with a description of the data
used and summarises the estimation results. Conclusions are drawn in the final
section.

2 Efficacies of the insurance-growth nexus

The role of the financial sector is to channel resources from savers to investment
projects and vice versa. The financial sector (1) improves the screening of fund
seekers and the monitoring of the recipients of funds, thus improving resource
allocation; (2) mobilises savings; (3) lowers the cost of capital via economies of
scale and specialisation; and (4) provides risk management and liquidity (Wachtel
2001; Scholtens and van Wensveen 2003). Insurance companies provide services
and/or carry out these activities mainly as providers of risk transfer and as investors.
Figure 2 depicts the channels of influence between the insurance sector and the
economy. As discussed in the following, the demographic and social setup (e.g. age
profile, religion, culture and risk propensity) as well as regulation and market
structure form the basis for interaction with the economy. In life insurance, assets
are an important part of saving, whereas liability (non-life) insurance has more of a
risk-sharing role.

3 Risk, saving and investment

3.1 Risk transfer

The primary function of insurance on the client side is risk transfer. Usually the
insured pays a premium and in return is secured against a specific risk. Measured in
terms of insurance premiums paid relative to GDP, the importance of insurance-

Fig. 2 Explanatory framework. Source: authors’ own compilation

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based risk transfer grew by about 1/3 between 1992 and 2002 in Europe (see Fig. 1).
The volume of premiums paid for life insurance relative to GDP nearly doubled in
the 1990s in Europe, providing insurance companies with a more prominent role in
financial intermediation.
The risks securable can either be loss of property or liabilities/losses accruing
from current and future activities. Thus securitisation facilitates various parts of the
economy that (heavily) rely on value preservation, e.g. trade, transport and lending,
and hence may increase consumption. Furthermore concerns about the negative
outcomes of activities are reduced and so insurance services can boost economic
development by helping to explore new scientific and technological possibilities. As
argued by Ward and Zurbruegg (2000), ‘‘[…] without access to product liability
insurance, firms, particularly pharmaceuticals, would be unwilling to develop and
market highly beneficial products’’. The implementation and utilisation of advanced
methods and the manufacture of better products may raise the efficiency of the
economy (Fig. 3).
An important trigger of growth in insurance volume during the last few years has
been credit insurance, which is a well-established means of transferring credit risk.
Via the credit derivatives market, a rapidly growing amount of credit risk has been
transferred across the financial system (Rule 2001; Stulz 2004). Credit default swaps
(CDS), collateralised debt obligations (CDOs) and other instruments allow credit
risk to be stripped out, isolated from underlying assets, and sold on separately
(Chaplin 1999; Effenberger 2004). The banking sector is mainly a buyer of
protection, while the insurance sector is mainly a seller of protection for investment
or portfolio management purposes (Rule 2001). At the end of 2003, the insurance
sector––particularly financial guarantors––reported a net position of USD 460 bil-
lion (EU 2005). Thus credit risk has been transferred on a massive scale from banks
to insurance companies, providing them with a more pivotal role vis-à-vis banks and
the economy at large.

Fig. 3 Life and non-life premiums in % of GDP in the country groups. Source: authors’ own
compilation, data from CEA (2006)

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While we would rather discuss the positive impact of insurance on growth, it is

important to note that insurance also can deter growth as it reduces the incentive for
the insured to engage in prudent behaviour and loss mitigation. Potential customers
may adapt their behaviour according to the price level of the desired insurance
product. This may have various outcomes. First of all, policyholders could reduce
their risk-taking to lower insurance costs. So insurances may lower the resource
dissipation and risk level the economy has to face. Depending on the insurance
costs, the signalling effect may also lead to the opposite situation where the insured
feels freed from taking precautionary measures against the secured event, denoted
as the ‘‘moral hazard’’ problem (Cummins and Doherty 2006). A survey of the
influence of workers’ compensation insurance by Butler et al. (1998) shows that due
to the beneficial insurance coverage, productivity is lower, the number of severe
injuries is higher and the periods of illness are longer than in companies not offering
this benefit. The problem of moral hazard increases with rising insurance
penetration rates, so more insurance consumption could lead to more resource
dissipation.
Another problem connected with securitisation is the ‘‘adverse selection’’
problem, which arises from the combination of miscalculation and price informa-
tion. In a vicious cyclical development the premiums are raised to meet accruing
costs, causing the least reliant customers to quit their contracts. This––in turn––
forces the insurance company to increase premiums again due to the decreased
customer base. This could continue until the insurance company goes out of
business, resulting in the inability of those most exposed to cover their exposure.
Several empirical studies, using either single-country or heterogeneous country
group samples, investigate the effect of the insurance sector as a provider of risk
transfer as summarised in Appendix 1. The relation of life insurance premiums to
growth is investigated by Browne and Kim (1993), Outreville (1996), Beck and
Webb (2003) and Lim and Haberman (2003) with rather positive findings. For non-
life insurance, Beenstock et al. (1988), Outreville (1990), Esho et al. (2004) and
Zou and Adams (2004) analyse the impact of property liability insurance on growth.
Browne et al. (2000) regress motor vehicle and general liability insurance premiums
to GDP and also find correlations. Ward and Zurbruegg (2000) and Boon (2005) use
total insurance premiums whereas Webb et al. (2002) and Arena (2006) also split
these into life and non-life premiums and interact them with bank and stock
markets, providing robust evidence of a causal relationship. So we regard it
important to include aggregate and sectorally split insurance premiums in our
empirical investigation in the comparatively homogeneous EU market environment
(Fig. 4).

3.2 Investment and insurance assets

The main objective of insurance companies is the transfer of risk, but insurance
companies are also one of the major investors in the economy, and increasingly so:
aggregate investment by insurance companies grew by 20% relative to GDP in
Europe within the time span of 1993–2004 while investment by life insurance

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Fig. 4 Life premiums (in % GDP), real interest rate in comparison to savings rate. Source: authors’ own
compilation, data from EUROSTAT (2007)

Fig. 5 Investment in % of GDP from life and non-life business in country sample. Source: authors’ own
compilation, data from CEA (2006)

companies nearly doubled over the same period (Fig. 5). The magnitude and setup
of the investment activities (see Figs. 5 and 6) could add to the explanation of the
insurance-growth nexus.
To understand the possible impact of assets held by insurance companies, the
peculiarities of the assets are essential, which are reflected in the companies’
liabilities (Davis 2001).1 The size of liabilities is defined by contract conditions and
the maturity and liquidity requirements are defined by the probability of the secured
event. The company needs assets, which produce steady earnings to build a capital
basis, which can cope with the liabilities after some time, and liquidation of the
assets has to be easy to be able to meet peak demand in case there is a major
disaster. So the investment policy focuses on stability and assets are usually more

1
For this short description we followed the financial economics perspective of Davis (2000), extending
the description to non-life insurers where appropriate. Further evidence is provided in CGFS, 2007

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Fig. 6 Investment per category in % of total investments; CEA country average. Source: authors’ own
compilation, data from CEA (2004)

Fig. 7 Investment per category in % of total investments; CEA country average. Source: authors’ own
compilation, data from CEA (2004)

liquid (Das et al. 2003).2 Additionally the majority of policies have a much longer
maturity than the usual bank deposits, so long-term investment possibilities are of
special interest (Miles 2003; Catalan et al. 2000).
Since 1990 the total assets of insurance companies have grown much faster than
those of banks (Raikes 1996). So an essential part of the contribution of insurance
companies to GDP growth derives from their assets, their investment activities and
the companies’ setup: what they invest in (e.g. real estate vs. stock markets, bonds,
etc.; see Figs. 6 and 7), where they invest (e.g. at home vs. abroad), and at what
maturity; finally the ability to exploit the difference between the individual
subjective risk assessment and the objective risk assessment based on actuarial
statistics defines the companies’ efficiency and contribution to growth. Several
positive effects can be traced back to insurance assets and investment activity:
Broadening the investment spectrum: in contrast to banks, the financial risks of
insurance companies are more uncertain and fluctuation can be higher. In general
the investment policies focus on stability and assets are usually more liquid. But in

2
For data see, for instance, financial & non-financial accounts from the ECB Monthly Bulletin on Euro
Area Statistics (http://www.ecb.int/stats/acc/nonfin/html/index.en.html).

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recent years, insurance companies were forced by a sustained period of low interest
rates to improve their returns by acquiring higher yielding, but more risky assets
(EU 2005; see Fig. 4). So a shift in the investment focus to less secure investments
can be noticed.
Expanding the investment horizon: assets held by a company usually reflect the
maturity of its liabilities (CGFS 2007). Insurance liabilities are usually of longer
term than those of banks (Webb et al. 2002; Catalan et al. 2000). This is especially
true for life insurers or specific risks such as product liability, where the arising
liabilities continue for many years and can sometimes not even be covered by an
appropriate investment element. So insurances have to rely on long-term
investments and hence are particularly qualified to play a large role in financial
markets trading long-term assets.
Increasing market volume: insurance companies are major investors in shares,
bonds and loans and real estate (see Figs. 6 and 7) in Europe. Directly and indirectly
covered insurers provide funds for investment and add to demand for the relevant
financial market instruments. By providing liquidity and depth, they improve the
overall performance of the respective markets. Due to higher liquidity it is much
easier for private and institutional investors to access diversified investment
portfolios and to invest in high-risk, high-productivity projects. The possible early
monetary realisation of asset holdings relieves investors from the struggles of
selling risky assets in tight markets. On the one hand this intensifies the pressure on
the economy to limit the waste of resources due to increased competition on the
market and on the other hand aids economic growth by smoothing the flow of funds
to capital-intensive projects (Arestis and Demetriades 1997; Levine and Zervos
1998). For example, Catalan et al. (2000) found evidence for the causal relationship
between the development of contractual savings and market development by
analyzing the progress of market capitalisation and value traded in stock markets
and the assets of pension funds and life insurances.
Improving market efficiency: In line with discussions about other intermediaries
holding assets, the positive influence of increased capital mobilisation, the pressure
on the domestic interest rate and the advantages of institutions of scale monitoring
companies apply to insurance companies as well (Grace and Rebello 1993 and
Leung and Young 2002). Efficiency improvement in the insurance market can put
additional pressure on other financial intermediaries and improve the contribution of
the financial sector to real growth (Pagano 1993; Bosworth and Triplett 2004).
To sum up, the investment activities of insurance companies have various effects
on the economy at large: market development by deepening and widening total
investment and knowledge transfer by calculating accurate risk levels. While
several studies highlight the importance of insurance investment on growth (e.g.
Arena 2006; Webb et al. 2002), the role of the insurance sector as an institutional
investor has hardly been empirically validated with regard to economic growth.
Notable exceptions are Boon (2005) investigating the effect of insurance funds on
GDP growth and Catalan et al. (2000) analysing insurance assets and their impact
on stock markets. We fill this gap by including insurance investment in our
empirical investigation.

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3.3 Demography, risk attitude, culture and religion

The peculiarities of a country’s society, restrictions and supervision may influence

the performance of the whole insurance sector. For example, the demographical and
religious setup of a country or region can dramatically alter the connection between
insurance consumption and economic development. The ageing of a population is of
major concern for the whole economy and especially for the pension and insurance
sectors, which are both directly affected by longevity and rising health care
expenses. Browne et al. (2000), for instance, examine the relationship between
insurance sector growth and demographic development. They find a positive
correlation between insurance growth and income per capita, wealth and legal
system features. Other correlations, like urbanisation, third-level education enrol-
ment, etc. depend on the examined insurance type, countries and other factors. In his
descriptive study Pye (2003) shows how income per capita and country-specific
effects can alter insurance consumption. Not only contemporary factors, but also
history and political-economic developments like deregulation can influence the
insurance sector.
Differences in risk attitudes across countries also influence the demand for
insurance. According to Fukuyama (1995), these risk attitudes are rooted in the
cultural context of the given country. Hofstede’s (1995) cultural dimensions relating
to ‘‘uncertainty avoidance/tolerance for ambiguity’’, ‘‘individualism/collectivism’’
and a temporal orientation (short vs. long-term) are directly related to risk attitudes
and have a major influence on a society’s demand for banking and insurance
services and institutions providing these (Kwok and Tadesse 2006). Park et al.
(2002) and Ward and Zurbruegg (2000) refer to these cultural factors when
interpreting the results of investigations on the impact of insurance premiums on
GDP. Although it does not have its own category in the frameworks, religious
orientation has a major influence on these cultural dimensions. Muslim countries,
for example, have the lowest insurance penetration rate due to their religion’s
emphasis on collectivism (Beck and Webb 2003; Webb et al. 2002). Similarly, risk
transfer to external institutions is not common in certain regions because society is
more collectively organised and emphasises the importance of family and friends.
Economic transactions beyond this immediate circle are rare and insurance coverage
obsolete in these cultures. Finally a society’s attitude to authority, government and
the rule of law is also important when examining the possible success of insurance
services. In developing countries where authority is weak, government not
recognised and rules and claims are not enforceable, security based upon family
or the clan is much more effective. The implication is that these national differences
should be kept in mind when setting up rather homogenous country groups for the
empirical investigation.

3.4 Regulations

This section briefly describes aspects of the legal framework affecting indemnity
services. Regulation and supervision accompany insurance companies from their
foundation (i.e. licensing principles), through daily operation (i.e. on-going

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supervision) and on liquidation or when in financial difficulties (Sterling 2000). The

licensing principles restrict the entrance of new institutions and restrict the
underwriting business to insurance companies. Usually life and non-life business
has to be separated in some kind of way, cross-sectoral activities are regulated and
various formal requirements have to be met, including approval of the business
plan/the risks the company intends to cover. These regulations have a bearing on
risk transfer via the insurance business by influencing the number and type of
competitors, the number of equivalent products and by setting standards for
managerial quality. Investment and portfolio regulations, on the other hand, are used
to maintain a certain level of solvency throughout the financial sector.3
Browne, Chung and Frees (2000) extend La Porta et al.’s (1998) law-and-finance
view to the insurance sector and find higher insurance penetration related to the
strength of the legal system. Esho et al. (2004) find that the strength of property
rights in a country are positively correlated to liability insurance consumption.
Moreover, the performance and strength of the insurance sector can affect
governmental behaviour via the provision of equivalent products. Similar to banks
relieving the pressure on governmental indebtedness, insurance policies reduce the
demand for public social security programs, life insurance, pension funds or trade
indemnity insurance (Das et al. 2003) so the regulatory environment matters greatly
(Ranade and Ahuja 2001; Kong and Singh 2005).
Insurance regulation, though converging in some aspects, still differs across the
globe in legal matters, directly influencing the terms of contracts and more general
articles of private law. With regard to the former, the range of country examples is
wide, spanning from liberal market advocacy leading to poor reserve coverage like
in the UK,4 to market protectionism like in Japan’s motor insurance sector resulting
in decreased sector efficiency (Hayakawa et al. 2000). Other legislation may alter
consumer rights in an unfavourable manner, creating additional hurdles for the
sector.5 Moreover, insurers are among the largest institutional investors and
shareholder rights directly affect their investment decisions. Furthermore property
and creditor rights influence the will to buy and invest, which again may result in
higher demand for insurance. We conclude that it is important to confine our
empirical analysis to countries sharing similar regulatory regimes.

3
Recently the European Commission created the Committee of European Insurance and Occupational
Pensions Supervisors (http://www.ceiops.org) to develop and coordinate the implementation of the new
Solvency II framework, which is more prudential and shall ensure capital adequacy better than Solvency
I, which has been in effect since the 1970s. In the US the NAIC maintains a ‘‘risk based capital’’ system,
which is comparable to but different from the Solvency II framework.
4
In the UK the determination of premiums, coverage, etc., is up to market mechanism and is under no or
little regulation.
5
Rees & Kessner (1999) compare the cross-border activities of British and German insurance companies
after the EU-wide harmonization of the regulatory systems in 1994 and argue that several other rules not
connected to the insurance business prevent British companies from entering and successfully working
the profitable market. For instance, German customers would have to pursue legal disagreements through
a British court.

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4 Estimations

4.1 Methodology

For these initial estimations we use premium income and total net investments of
insurances as proxies for the demand for insurance services. Premium income is
further split into life- and non-life (liability) premium income. Following Eller et al.
(2006), Fink et al. (2005) and Webb et al. (2002), we adopt an endogenous growth
model with a modified Cobb-Douglas production function assuming constant
returns to scale and perfect competition:
Y ¼ ecA0 þ cA1 INS K a H b L1 $ a $ b ; ð1Þ
where Y represents the output (real GDP), ecA0 þ cA1 INS denotes technological progress
split into a constant value and a part induced by insurance services, K resembles the
physical capital, H stands for human capital and finally L is the used labour force.
After transforming Eq. 1 into the intensive form, taking logarithms on both sides
and differentiating, we can estimate the two factor shares a, b and the influence of
technology and insurance (cA0, cA1):
D lnðyit Þ ¼ cA0 þ cA1 DINSit þ aD lnðkit Þ þ bD lnðhit Þ ð2Þ
However, we depart from Arena (2006) and Webb et al. (2002) by not including
banking and stock market variables directly in the analysis and using real interest
rates as an indirect indicator instead, following Beck and Webb (2003). While their
focus is mainly on the interaction of the insurance sector, as a provider of risk
transfer (i.e. through premiums), with other financial sectors, we concentrate on the
insurance sector only, but also include its role as an institutional investor. Given the
arguably strong and varied links between insurance companies, banks and the stock
market (e.g. insurance companies selling risk indemnification for bank loans via
CDS; insurance companies investing in stocks or banks’ term deposits; cross-
sectoral M&A etc.) there is a certain overlap of their businesses and assets
especially on the investment side. Including all the sectors directly in the same
equation might thus run the risk of ‘‘double counting’’, which we want to avoid
given our inclusion of insurance investment as an explanatory variable.
The countries selected for investigation are all from the same area (Europe), are
subject to common and converging regulation and strongly connected to each other
as EU members, Accession Countries (Croatia, Turkey) or via the European
Economic Area and similar treaties (Switzerland, Norway, Iceland). As insurance
companies are relatively more important as institutional investors in Europe than in
the US where pension and mutual funds dominate, it also makes sense to
concentrate on the European setting. The aggregate European sample is denoted
EEA. In order to avoid structural breaks in the ‘‘old’’ EU-15 we use 1992––the
inception of the Single European Market––as a starting point. For CEE countries, no
earlier data is available. With a sample period of 13 years and a rather homogenous
country group/split we assume the country-specific intercepts to be fixed constants
over time. Tests for redundant fixed effects and specific country dummies were
carried out, but showed no evidence of incorrect assumptions. Possible

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autocorrelations between the dependent variable and the explanatory variables were
included to prevent misjudging of the results. To accommodate for differences in
market structures, we also conducted the same tests for two country groups. The
group denoted as EU-15+ consists of the EU-15, Norway, Switzerland and Iceland.
The group denoted CEE+ pools the new (2004, 2007) EU Member States from
Central and Eastern Europe, as well as Croatia and Turkey as Accession Countries.
Following Hsiao (2003), we use panelled data to improve the estimation
efficiency and to reduce the impact of short-run fluctuations, as already suggested
by the indexation of the variables in (2). While the 1992–2005 period covers at least
a full business cycle, it is possible that certain short-term effects are picked up. Our
findings should therefore be taken as preliminary indications. Shifts and short-run
movements in the time dimension are to be considered and time-specific dummies
should be incorporated. Country-specific shocks may distort results as well and
should be restricted by the inclusion of country dummies. A dynamic panel may be
favourable for testing for omitted variable bias and possible endogeneity bias, but
for this first estimation we would like to stick to the equations selected, which
contain no lagged dependent variable, and the implementation of lagged premium
data is still possible. Due to the short time period covered we also assume the slope
coefficients in the growth equation to be independently distributed and hence
homogenous per year. Country differences are explained by varying intercepts
between countries. Inflation and real interest rate are added as control variables.
In the following we provide a short description of the data used for the variables
introduced in Eqs. 1 and 2 above:
• Real GDP per employee (yit): real GDP at constant year 2000 prices in constant
2000 US Dollars per employee.

• Physical capital stock (kit): real physical capital stock at constant year 2000
prices in constant 2000 US Dollars per employee.6

• Human capital stock (hit): constructed index using weighted employee education
figures.7 and R&D expenditure as a utilisation of the employee’s knowledge8

• Insurance indicators (INSit): to test the effect of the insurance sector as a

provider of risk transfer, gross premium income as total sum and as life and non-
life premium income calculated in constant year 2000 prices and US Dollars.
Furthermore yearly total investments (INV) are used to test the effect of the
insurance sector as an institutional investor.
Explanatory variables:
• Interest rate (INTit): 10-year government bond yields, secondary market, annual
average.
6
The time series of the physical capital stock were calculated using perpetual inventory methods. Initial
capital stock was calculated according to Easterly & Levine (2001).
7
Education level weights according to ISCED-classification: 0–2 = 1, 3–4 = 1.4, 5–6 = 2.
8
R&D expenditure as % of real GDP.

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• Inflation rate (INTit): annual average inflation according to the Harmonised

Indices of Consumer Prices (HICP) from EUROSTATS.

4.2 Estimation results

The estimation9 output is summarised in the following tables, beginning with the
results for the whole EEA sample for life, non-life, joint premiums and investments.
For all three groups, calculations with the current and the lagged values of real total
premiums, life and non-life premiums were carried out. The peculiarities of the
results are discussed following each table and there is an overall summary at the end
of the section.
The results for the whole EEA panel show no significance for the insurance
service, except for a negative impact of the lagged non-life insurance premiums.
However, this result has to be treated with care due to autocorrelation. Interestingly,
human capital entered negatively into each specification, so some deeper analysis
had to be done. The results are shown in the table below. Removing the real interest
rate from the estimation setup changes the situation completely.
Resembling the results of Arena (2006), the current form of premium income
shows a positive significance for economic growth. Insurance investments have no
significant impact. In the lagged form, the former sign changes, suggesting a
negative role for economic growth. For total and non-life premium income, a
combined estimation was carried out to see which lag is superior.
As can be observed in Table 1, total current premium income is superior over the
lagged form, albeit losing significance. If the interest rate is added, both variables
enter negatively but insignificantly. Last year’s non-life premium income is superior
over the current year’s income and stays negatively significant if the interest rate is
added to the estimation. When considering the interest rate, premiums are negative
for economic development, suggesting insufficient returns, which would be in line
with the findings of Davis (2001) and Lim and Haberman (2003).
To account for the different developmental stages and different sectoral patterns
(share of life vs. non-life; see Fig. 3) of the sample countries, the whole EEA panel was
split into mature market economies (EU-15+) on the one hand and CEE+ countries on
the other; the latter can be regarded as ‘‘emerging’’ over parts of the 1992–2005 time
period covered. The results for the EU-15+ mirror those for the whole EEA panel
when considering the interest rate (see Table 2). Non-life premiums are insignificant
for GDP growth but the investments of the previous year enter positively. This
relationship stays strong and significant if the interest rate and/or inflation rate
is removed. The positive sign of the interest rate could be explained by the fact that in
the sample’s time span, the interest rate generally remained low and countries with
rates higher than the EU average (like the UK) had better GDP growth rates.
Table 3 is devoted to the results of the estimations for the CEE+ group
containing New EU Member States and Accession Countries with less developed
and smaller life insurance markets (see Fig. 3). Non-life premium income of the
9
Estimation method: OLS on unbalanced panel with country & time-fixed effects and adjusted
autocorrelation where appropriate.

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Table 1 Estimation results for the whole EEA panel
Series/Variable Current form Lagged form

Total Life Non-life Invest. Total Life Non-life Invest.

C 0.0151 (0.000) 0.0196 (0.000) 0.0194 (0.000) 0.0219 (0.000) 0.0244 (0.000) 0.0242 (0.000) 0.0243 (0.000) 0.0247 (0.000)
INS 0.0208 (0.124) 0.0048 (0.468) 0.0133 (0.555) -0.0022 (0.409) -0.0115 (0.207) -0.0043 (0.522) -0.0383 (0.005) 0.0018 (0.506)
K 0.6404 (0.000) 0.6425 (0.000) 0.6380 (0.000) 0.6244 (0.000) 0.5445 (0.000) 0.5434 (0.000) 0.5722 (0.000) 0.5107 (0.000)
H -0.0089 (0.717) -0.0121 (0.588) -0.0107 (0.565) -0.0066 (0.768) -0.0011 (0.957) -0.0002 (0.991) -0.0060 (0.773) -0.0084 (0.705)
Inflation -0.0009 (0.000) -0.0013 (0.000) -0.0013 (0.204) -0.0015 (0.000) -0.0014 (0.000) -0.0014 (0.000) -0.0014 (0.000) -0.0015 (0.000)
Interest -0.0014 (0.000) -0.0020 (0.000) -0.0029 (0.000) -0.0023 (0.000) -0.0023 (0.000) -0.0023 (0.000) -0.0022 (0.000) -0.0024 (0.000)
Obs. 309 309 309 289 290 290 290 275

Source: Authors’ own calculations; bold denotes significance at the 10% level
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Table 2 Estimation results with altered specification; whole EEA panel

Series/Variable Current form Lagged form

Total Life Non-life Invest. Total Life Non-life Invest.

C 0.0069 (0.001) 0.0074 (0.000) 0.0071 (0.007) 0.0084 (0.000) 0.0125 (0.000) 0.0117 (0.000) 0.0129 (0.000) 0.0111 (0.000)
INS 0.0274 (0.039) 0.0148 (0.044) 0.0425 (0.023) -0.0030 (0.353) -0.0202 (0.066) -0.0056 (0.547) -0.0592 (0.000) -0.0010 (0.734)
K 0.7868 (0.000) 0.7886 (0.000) 0.7698 (0.000) 0.8074 (0.000) 0.7166 (0.000) 0.7165 (0.000) 0.7494 (0.000) 0.7047 (0.000)
H 0.0154 (0.527) -0.0135 (0.580) 0.0181 (0.482) 0.0227 (0.388) 0.0196 (0.421) 0.0219 (0.438) 0.0103 (0.667) 0.0219 (0.405)
Inflation -0.0009 (0.000) -0.0010 (0.000) -0.0009 (0.009) -0.0011 (0.000) -0.0011 (0.000) -0.0011 (0.000) -0.0010 (0.000) -0.0011 (0.000)
Obs. 312 312 312 290 293 293 290 277

Source: Authors’ own calculations; bold denotes significance at the 10% level

Empirica
 Empirica
Table 3 Estimation results with current and lagged form; whole EEA panel
C INS INS (t - 1) K H Inflation Interest

Total 0.0106 (0.000) 0.0217 (0.106) -0.0183 (0.097) 0.7264 (0.000) 0.0213 (0.380) -0.0010 (0.000)
Total 0.0251 (0.000) -0.0068 (0.564) -0.0123 (0.191) 0.5390 (0.000) -0.0018 (0.930) -0.0014 (0.000) -0.0023 (0.000)
Non-life 0.0111 (0.000) 0.0407 (0.023) -0.0611 (0.003) 0.7486 (0.000) 0.0141 (0.524) -0.0010 (0.001)
Non-life 0.0243 (0.000) -0.0003 (0.987) -0.0383 (0.057) 0.5721 (0.000) -0.0006 (0.706) -0.0014 (0.000) -0.0022 (0.000)

Source: Authors’ own calculations; bold denotes significance at the 10% level
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current form enters positively and the lagged form enters negatively. This again
raises the question of superiority. If both forms are added to the equation, the lagged
form stays significant and its coefficient is nearly double that of the current form,
suggesting a burden for the following year due to high interest rates. If the interest
rates are dropped from the estimation specification, as was the case for the whole
EEA panel in Table 4, total and non-life premium income become significant again
and human capital changes its sign. In the combined form, the positive impact of
current expenditure is superior to the previous year’s expenditure (Table 5).
Overall the findings suggest a significant connection between insurance services
and economic growth, but also emphasise the importance of the interest rate and the
level of economic development for the insurance sector. In the EU-15+ group, where
life insurance amounts to 2/3 of total insurance business, the investment activity is
beneficial to the economy. In the emerging economies of Central and Eastern Europe
(CEE+), where non-life insurance amounts to more than ! of total insurance
business, the non-life insurance services seem to be positive for economic growth.
When comparing our findings with previous work, we can support Webb et al.
(2002) stating that non-life insurance income is not significant if the whole EEA
panel is examined. Referring to Davis (2001) and Lim and Haberman (2003), we
confirm that interest rate development and the impact of the insurance sector
interact. When real interest rates are excluded, we can support Arena (2006), but
this may hold mainly for emerging and developing economies. The results for the
EU-15+ group, containing only countries with well-developed, mature financial
systems, are similar to the findings of Catalan et al. (2000), Davis and Hu (2004)
and Boon (2005). Given the differences between the EU-15+ and CEE+ country
groups, we can support Davis (2001) and La Porta et al. (1998) in terms of
regulation and the environment perhaps being essential indicators of efficient
financial systems and hence influencing growth.

5 Conclusion

The main intention of this article is to add to the understanding of the role of the
insurance sector in the finance-growth nexus, i.e. whether and how insurance
influences economic growth. The rationale behind this notion is twofold: on the one
hand, the importance of the insurance sector within total financial intermediation
has risen over time, and the magnitude and intensity of links between insurance,
banking and capital markets have also risen; thus the likely impact of insurance on
the economy should have increased. The literature on finance and growth does not,
however, pay sufficient attention to the important and rising role played by non-
bank financial intermediaries such as insurance companies.
We identified risk transfer (i.e. bearing risk for other economic agents which
might stabilise their income streams, dampen volatility and enhance economic
activity) and investment (e.g. by increasing over-all investment volumes, by
deepening capital markets and by broadening the investment range) as major
channels through which the insurance sector may aid economic growth. We also
discussed the impact of socio-demographic and legal issues and argue that these

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Table 4 Estimation results for EU 15+ Group
Series/Variable Current form Lagged form

Total Life Non-life Invest. Total Life Non-life Invest.

C 0.0031 (0.117) 0.0031 (0.109) 0.0037 (0.060) 0.0040 (0.051) 0.0009 (0.761) 0.0010 (0.731) 0.0008 (0.767) -0.0004 (0.894)
INS 0.0051 (0.653) 0.0049 (0.443) -0.0135 (0.397) 0.0050 (0.653) 0.0027 (0.810) -0.0013 (0.829) 0.0055 (0.747) 0.0242 (0.031)
K 0.6176 (0.000) 0.6175 (0.000) 0.6172 (0.000) 0.5838 (0.000) 0.7213 (0.000) 0.7206 (0.000) 0.7186 (0.000) 0.6959 (0.000)
H -0.0255 (0.449) 0.0256 (0.447) 0.0285 (0.398) -0.0037 (0.919) -0.0201 (0.555) -0.0190 (0.578) -0.0198 (0.560) -0.0339 (0.353)
Inflation -0.0025 (0.000) -0.0025 (0.003) -0.0024 (0.000) -0.0025 (0.000) -0.0015 (0.046) -0.0014 (0.056) -0.0015 (0.047) -0.0014 (0.071)
Interest 0.0021 (0.000) 0.0021 (0.000) 0.0021 (0.000) 0.0021 (0.000) 0.0018 (0.000) 0.0019 (0.001) 0.0019 (0.001) 0.0018 (0.001)
Obs. 215 215 215 207 183 183 183 176

Source: Authors’ own calculations; bold denotes significance at the 10% level
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Table 5 Estimation results, CEE+ Group

Series/Variable Current form Lagged form

Total Life Non-life Invest. Total Life Non-life Invest.

C 0.0231 (0.000) 0.0283 (0.001) 0.0201 (0.001) 0.0278 (0.000) 0.0286 (0.000) 0.0285 (0.000) 0.0302 (0.000) 0.0295 (0.000)
INS 0.0179 (0.538) 0.0028 (0.831) 0.0544 (0.082) -0.0039 (0.331) -0.0058 (0.739) -0.0011 (0.923) -0.0474 (0.066) -0.0013 (0.750)
K 0.7536 (0.000) 0.7471 (0.000) 0.7683 (0.000) 0.7705 (0.000) 0.6940 (0.000) 0.6903 (0.000) 0.7129 (0.000) 0.6847 (0.000)
H -0.0224 (0.534) -0.0128 (0.572) -0.0198 (0.572) -0.0154 (0.656) -0.0076 (0.820) -0.0074 (0.827) -0.0107 (0.744) -0.0075 (0.827)
Inflation -0.0010 (0.000) -0.0011 (0.000) -0.0009 (0.000) -0.0011 (0.000) -0.0011 (0.000) -0.0011 (0.000) -0.0011 (0.000) -0.0011 (0.000)
Interest -0.0020 (0.000) -0.0026 (0.000) -0.0019 (0.000) -0.0024 (0.000) -0.0024 (0.000) -0.0024 (0.000) -0.0022 (0.000) -0.0025 (0.000)
Obs. 94 94 94 82 90 90 90 82

Source: Authors’ own calculations; bold denotes significance at the 10% level

Empirica
Empirica

matter for the conduct and, consequently, the impact of insurance companies on the
economy. We also provided descriptive evidence for the magnitude and develop-
ment of the life and non-life insurance sector in Europe and the structure of
insurance investments.
Using premium income (to test the effect of the insurance sector as a provider of
risk transfer) and investment (to test the effect of the insurance sector as an
institutional investor), we developed a modified production function to represent our
endogenous growth model. By concentrating on European countries, we tried to
keep the socio-economic and legal environment constant. We analysed panel data of
29 European––mainly EU countries––from the inception of the Single European
Market in 1992 to 2005 in a standard growth-accounting (production function)
framework. We also separated the aggregate sample into a group consisting of
mature market economies (mainly the ‘‘old’’ EU-15) and one consisting of former
transition economies, mainly the New EU Members states from Central and Eastern
Europe (CEE). Our contribution lies in analysing both risk transfer and investment,
in analysing a comparatively homogeneous European sample for both life and non-
life segments, and, for the first time, by analysing the CEE markets with regard to
the contribution of the insurance sector to GDP growth. Our results provide
evidence for a correlation between insurance investments and GDP growth for EU-
15 countries with mature financial markets and a short-run connection between non-
life expenditure and GDP for the emerging-market-type CEE/NMS countries.
Furthermore, our findings emphasise the impact of the real interest rate and the level
of economic development for the insurance-growth nexus.
We conclude that there is a good theoretical justification for the insurance sector
influencing economic growth (and vice versa) and a certain amount of empirical
evidence. Our findings suggest that there are differences between less developed
countries and countries with mature financial markets which are worth observing
and which may point to future possibilities in investigating the nexus further by
using different indicators for insurance engagement and the model setup and longer
time periods. Given the huge body of research on the relationship between bank/
capital market-finance and economic growth, there is definitely a need for more
empirical work on the insurance-growth nexus, both relating to insurance along and
by including insurance in broader investigations if the issue of ‘‘double counting’’
overlapping business can be avoided. The disparity between the importance of the
insurance sector for the finance-growth nexus and the attention paid to it to date by
researchers prompts us to recommend conducting further investigations, which
would help to eliminate essential knowledge gaps in macroeconomic theory.

Appendix 1: Review of empirical studies on the insurance-growth nexus

Beenstock et al. (1988) apply cross-section analysis to 1970–1981 data covering 12

countries. They regress premiums for property liability insurance (PLI) onto gross
national product (GNP), income and interest rate development. They find that
premiums are correlated to interest rate and GNP; the marginal propensity to insure
(short- & long-run) rises with income per capita and is always higher in the long

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run. Beenstock et al. (1988) argue that insurance consumption is not affected by
economic cycles or cyclical income variations.
Outreville (1990) conducts a cross-section analysis of PLI premiums for the years
1983 and 1984 for 55 developing countries as related to GDP, insurance price and
other macroeconomic figures. The results are similar to Beenstock et al.’s (1988)
and support the significance of income and financial development (M2/GDP). Other
explanatory variables do not seem to be important. Problems in the investigated
countries are insufficient demand for insurance services and hence the resulting
unbalanced portfolio of the insurer.
Browne and Kim (1993) conduct a cross-sectional analysis of life insurance
consumption per capita for 45 countries for the years 1980 and 1987. Income,
dependency and social security expenses are positively correlated while inflation is
negatively correlated and significant in both years. Religious origins––i.e. a country
being Muslim––is always negatively connected to insurance consumption and so the
findings support the works of Hofstede (1995, 2004) and Fukuyama (1995) in their
reasoning that social back-up influences insurance demand.
Outreville (1996) investigates the correlation of life insurance premiums to GDP
and other factors for the year 1986 for 48 developing countries. The results
contradict his former work (Outreville 1990) by showing no significance for real
interest rate or financial development (M2/GDP). Only the income elasticity is
similar to those found in earlier works (Beenstock et al. 1988, Outreville 1990 and
Browne and Kim 1993).
Zhi Zhuo (1998) focuses on China, conducting a cross-regional study for 1995
and a time-series analysis for the period 1986 to 1995. In accordance with other
findings both the cross-regional and the time-series analysis show that GDP per
capita and the consumer price index are significantly correlated with insurance
consumption. Furthermore the children-dependency ratio is important, whereas the
level of education is not causally related.
Browne et al. (2000) apply a panel model to motor vehicle (MV) and general
liability (GL) insurance in the OECD over the 1986–1993 period. Income and the
legal system are positively correlated to insurance consumption, while loss
probability and wealth are negatively correlated. The number of foreign firms in
the market and higher risk aversion increase MV consumption. Browne et al. (2000)
argue that income affects insurance consumption. The correlation with risk aversion
is statistically insignificant for MV consumption and negatively connected in the
cross-sectional model for GL consumption.
Catalan et al. (2000) analyse the Granger causality of insurance assets for 14
OECD and five developing countries over the 1975–1997 period vis-à-vis GDP
growth (among others). According to their analysis, contractual savings seem to
have some connection to market capitalisation (MC) and value traded (VT) in the
majority of countries. The correlation between MC and pension funds shows similar
links to its connection to contractual savings, but the pension funds-VT nexus is
mixed. In Catalan et al.’s (2000) analysis, nine OECD countries support the life
insurance-MC link while the results for the developing countries are mixed.
Evidence for the life insurance-VT connection is not so strong in OECD countries,
whereas the majority of non-OECD countries show this link. The impact of the non-

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life business is almost equal to the impact of the life business for MC and less so for
VT. The authors favour contractual savings institutions over other institutional
investors (e.g. non-life insurance) and so they recommend an appropriate
sequencing of the financial institutions’ development.
Ward and Zurbruegg (2000) analyse the Granger causality between total real
insurance premiums and real GDP for nine OECD countries over the period 1961 to
1996. For two countries (Canada, Japan) the authors found that the insurance market
affected GDP and for Italy they found a bidirectional relationship. The results for
the other countries showed no connection. The results from the Error-Correction
model depicted similar results and added Australia and France to the group of
countries providing evidence for some kind of connection
Beck and Webb (2002) apply a cross-country and a time-series analysis for the
relation between life insurance penetration, density and percentage of private
savings and GDP as the dependent variables and GDP, real interest rate, inflation
volatility and others as the explanatory variables. Strong evidence was found for
influences of GDP, old dependency ratio, inflation and banking sector development.
From the group of additional explanatory variables, anticipated inflation, the real
interest rate, secondary enrolment and the private savings rate were found to be
significant. When analysing the share of life insurance in private savings, the results
suggest that the ratio decreases with an increasing saving rate although the saving
rate has a positive coefficient. This could be due to the preference of households to
limit life insurance expenses and transfer additional income to other forms of
saving.
Park et al. (2002) concentrate on the link between insurance penetration and
GNP and some socio-economic factors adopted from Hofstede (1983). The results
of the analysis of the cross-sectional data from 38 countries in 1997 show
significance for GNP, masculinity, socio-political instability and economic freedom.
Deregulation was found to be a process capable of facilitating growth in the
insurance industry, supporting the expectations of Kong and Singh (2005).
Webb et al. (2002) use a Solow-Swan model and incorporate both the insurance
and the banking sector, with the insurances divided into property/liability and life
products. Their findings indicate that financial intermediation is significant. When
split into the three categories, the banking and life sector remain significant for GDP
growth, while property/liability insurances lose their importance. Furthermore,
results show that a combination of one insurance type and banking has the strongest
impact on growth.
Lim and Haberman (2003) concentrate on the Malaysian life insurance market.
While the interest rate for savings deposits and price enter significantly in the
equation, the positive sign for the interest rate puzzles the authors. This could be in
line with findings by Webb et al. (2002) that the best results are obtained when
insurance and the banking sector are combined in the estimates. Price elasticity is
found to be more than even.
The work of Davis and Hu (2004) is special in terms of the direction of the
regression and the variable setup. The authors test for causality between output per
worker (OW) as the dependent variable and pension fund assets (PFA) and capital
stock per worker (CS) on the explanatory side with data spanning 43 years from

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1960 to 2003 for 18 OECD countries and 20 East & Middle East (EME) countries.
The results give evidence for PFA and CS having a positive and significant effect on
OW. The dynamic heterogeneity findings of the models support the OLS results in
the long run. The co-integration test suggests that PFA and CS are co-integrated
with OW. The findings also show that PFA development has a stronger impact on
OW in EME countries than in OECD countries.
Zou and Adams (2004) provide insights into the Chinese property insurance
market for the years 1997 to 1999. Due to market regulation and the specialities of
the Chinese market, this work is more suitable to provide evidence for the law-and-
finance view of La Porta et al. (1998) or the socio-political decision model of
Hofstede (1995). The results show a tendency for companies that are highly
leveraged or have physical-assets intensive production to consume property
insurance, while partial state-ownership or a possible tax-loss carry-forward
decreases demand. Increased managerial or foreign ownership and better growth
options facilitate demand, while the size of the company enters inversely.
Esho et al. (2004) focus on the legal framework alongside the GDP-Property-
Causality Insurance Consumption (PCI) link. The causality analysis is based on data
from 44 countries from 1984 to 1998 and includes OLS and fixed-effects
estimations and a GMM estimation on panel data. No matter which methodology is
used, real GDP and the strength of the property rights in a country are positively
correlated to insurance consumption. The insurance demand is significantly
connected to loss probability, but the link with risk aversion is rather weak. The
price only shows a slight, negative impact if investigated with the GMM estimator.
Although the data set showed major differences between the developments of
countries of different legal origins (PCI per capita, GDP, PCI price, etc.), no
evidence was found for the legal origin being a significant indicator for PCI
consumption. In contrast to other sectors, the importance of property rights suggests
that the legal environment facilitates demand for insurance.
Boon (2005) investigates the growth supportive role of commercial banks, stock
markets and the insurance sector for Singapore. The author’s findings show short- and
long-run causality running from bank loans to GDP, and a bi-directional relationship
between capital formation and loans. GDP growth seems to enhance stock market
capitalisation in the short run and market capitalisation enters significantly when
determining capital formation in the long run. Total insurance funds affect GDP
growth in the long run and capital formation in the short and the long run.
Kugler and Ofoghi (2005) focus on the UK and analyse the long-run relationship
and Granger causality between insurance premiums and economic growth for the
period 1966–2003. Johansen’s cointegration test shows a long-run relationship
between insurance and growth; the causality test indicates insurance-inducing
growth for the majority of the analysed insurance products. Life, liability and
pecuniary loss insurance do not cause growth in the short run.
Adams et al. (2005) conduct an analysis similar to Kugler and Ofoghi (2005) but
focus on Sweden for the period of 1830–1998 and include additional variables like
bank lending. Bank lending seems superior to insurance services and causes growth
in the nineteenth century. In the twentieth century, the causality is reversed.
Insurance seem to be more driven by economic growth.

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Arena (2006) uses a GMM estimator to analyse panel data of 56 countries in the
period 1976–2004. Total premiums, life and non-life premiums are regressed
separately, together with stock market turnover and private credit. All three types of
premium seem to be causal for GDP growth. Life insurance has more impact in
high-income countries, while non-life is significant for growth in both country
groups.

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