Anda di halaman 1dari 8

The Relationship between Insurance and Economic Growth 1

The Relationship between Insurance and Economic Growth in Bangladesh


A Theoretical and Empircal Analysis
ID-19-011

[Shortened Title up to 50 Characters] 2


Abstract
This article examined the short and long-run relationships between economic growth and insurance sector
development in the Nigerian economy. Gross domestic product (GDP) was adopted as a proxy for the
level of economic growth, while numbers of insurance companies (NIC), premium of life-insurance
(PLI), premium of non-life insurance (NLP), total insurance investment (TII), and inflation rate (INF)
were used in measuring insurance sector growth. The findings revealed that insurance sector growth and
development positively and significantly affects economic growth. The insurance companies should also
engage in insurance business that is environment and customer friendly, as well as, formulating insurance
policies that can accommodate every sector and segment of the economy.
Keywords: Insurance, economic growth, Bangladesh

[Shortened Title up to 50 Characters] 3


The

Relationship

between

Insurance

and

Economic

Growth

in

Bangladesh

A Theoretical and Empircal Analysis


Introduction

According to the finance-growth nexus theory, financial development promotes economic


growth through channels of marginal productivity of capital, efficiency of channeling savings to
investment, saving rate and technological innovation (Levine, 1997). Affecting economic growth
through these channels is realized by functions of financial intermediaries. These functions
include the provision of means for clearing and settling payments to facilitate the exchange of
goods, services and assets, the provision of a mechanism for pooling resources together and
channeling them to the most productive sector of the economy for investment, risk management,
and price information to help coordinate decentralized decision making in various sectors of the
economy, among others (Merton and Bodie, 1995). Among financial intermediaries, the
insurance companies play important role, they are the main risk management tool for companies
and individuals. Through issuing insurance policies, they collect funds and transfer them to
deficit economic units for financing real investment. The importance of insurance is growing due
to the increasing share of the insurance sector in the aggregate financial sector in almost every
developing country. Insurance companies, together with mutual and pension funds, are one of the
biggest institutional investors in stock, bond and real estate markets and their possible impact on
the economic development will rather grow than decline due to issues such as widening income
disparity and globalization. Insurance companies are similar to banks and capital markets as they
serve the needs of business units and private households in intermediation. The availability of
insurance services is essential for the stability of the economy and can make the business
participants accept aggravated risks. By accepting claims, insurance companies also have to pool
premiums and form reserve funds. So, insurance companies are playing an important role by
enhancing internal cash flow at the assured and by creating large amount of assets placed on the
capital market. Theoretical studies and empirical evidence have shown that countries with better
developed financial system enjoy faster and more stable long-run growth of which insurance
companies contribute to. Well-developed financial markets have a significant positive impact on
total factor productivity, which translates into higher longrun development. Based on Solows
(1956) work, Merton (2004) noted that due to the absence of a financial system that can provide
the means of transforming technical innovation into broad implementation, technological

[Shortened Title up to 50 Characters] 4


progress will not have significant and substantial impact on the economic development and
growth. The main objective of this article is to investigate the link between the insurance sector
development and economic growth of Bangladesh and hence to fill a gap in the current financegrowth nexus.
The Insurance- Growth Model
Economic growth is the increase in the inflation-adjusted market value of the goods and services
produced by an economy over time. It is conventionally measured as the percent rate of increase in
real gross domestic product, or real GDP, usually in per capita terms.
Growth is usually calculated in real terms i.e., inflation-adjusted terms to eliminate the distorting
effect of inflation on the price of goods produced. Measurement of economic growth uses national
income accounting. Since economic growth is measured as the annual percent change of gross
domestic product (GDP), it has all the advantages and drawbacks of that measure. The "rate of
economic growth" refers to the geometric annual rate of growth in GDP between the first and the last
year over a period of time. Implicitly, this growth rate is the trend in the average level of GDP over
the period, which implicitly ignores the fluctuations in the GDP around this trend.
An increase in economic growth caused by more efficient use of inputs (such as labor
productivity, physical capital, energy or materials) is referred to as intensive growth. GDP growth
caused only by increases in the amount of inputs available for use (increased population, new
territory) is called extensive growth.[3]

To assess the economic development of a country, geographers use economic indicators including:
Gross Domestic Product (GDP) is the total value of goods and services produced by a country in a year.
Gross National Product (GNP) measures the total economic output of a country, including earnings from
foreign investments.
GNP per capita is a country's GNP divided by its population. (Per capita means per person.)
Economic growth measures the annual increase in GDP, GNP, GDP per capita, or GNP per capita.
Inequality of wealth is the gap in income between a country's richest and poorest people. Inflation
measures how much the prices of goods, services and wages increase each year. High inflation (above a
few percent) can be a bad thing, and suggests a government lacks control over the economy.
Unemployment is the number of people who cannot find work.
percentage %
GDP
INFLATION
Unempolymen

2014
6.5
7.01
5.00

2013
6.01
7.54
5.00

2012
6.52
6.23
5.00

2011
6.46
11.46
5.00

[Shortened Title up to 50 Characters] 5


t

Insurance Industry in Bangladesh


Following independence of Bangladesh in 1971, insurance industry was nationalized in 1972 and the
Government established 4 (Four) insurance corporations and in the year 1973 the structural arrangement
of nationalization was changed into two corporations: (a) Sadharan Bima Corporation For transacting
non-life insurance business; (b) Jiban Bima Corporation for transacting life insurance business.insurance

Tk.(million)
Year
Life

Premium
2013
2012
64280 65871

2011
62814

Asset
2013
24468

Non-Life

12505

Total

76785

2011
20294

Investment
2013
2012
19290 19207

2012
23963

2011
153318

15947

11456

0
85895

4
78121

5
55443

0
22983

0
19258

22950

81818

74270

33057

31775

25838

21588

211328

176268

[Shortened Title up to 50 Characters] 6

Insurance Industry Scenario 2011-13


350000

330575

317755

300000
258388
250000

211328

215883

81818

76785

2012

2013

200000
176268
150000
100000
74270
50000
0
2011
Total Asset

Total Premium

Total Investment

[Shortened Title up to 50 Characters] 7


References
R. King and R. Levine, Finance and growth: Schumpeter might be right, The Quarterly Journal of conomics 8
(1993): 717.
. P. Haiss and K. Sumegi, The Relationship of Insurance and Economic Growth A Theoretical and Empirical
Analysis, (paper presented at the 2006 EcoMod Conference, Hong Kong, June 2830, 2006): 1.
J. Robinson, The Generalization of the General Theory, in The Rate of Interest and other ssays, (London
1952), 86.
R. E. Lucas, Wykady z teorii wzrostu gospodarczego,(Warszawa: Wydawnictwo C. H. Beck, 2010), 34
R.I. McKinnon, Money and Capital in Economic Development, (Washington D.C., 1973).
P.M. Romer, Increasing Returns and Long-Run Growth, Journal of Political conomy 94 (1986).
G.M. Coparale, P.G.A. Howells and A.M. Soliman, Endogenous growth models and stock market development:
Evidence from four countries, vol. 9 of Review of Development conomics 2 (2005): 166176. 11. J.G. Gurley
and E.S. Shaw, Financial Intermediaries and the Saving-Investment Process, The Journal of Finance 11 (1956).
Lim, Chee Chee / Haberman, Steven, 2003, Macroeconomic Variables and the Demand for Life Insurance in
Malaysia, Faculty of Actuarial Science and Statistics, CASS Business School, City University London.
McKinnon, R. I., 1973, Money and Capital in Economic Development, Washington D. C. Brookings Institution.
Mendels, F. F., 1972, Proto-industrialisation: The First Phase of the Industrialisation Process, Journal of Economic
History No. 32.
Merton, Robert, C., 2004, On Financial Innovation and Economic Growth, Foreword in Harvard China Review Vol.
5. Miles, Colin, March 2002, Large Complex Financial Institutions (LCFIs): Issues to be considered in the FSAP,
MAE Operational Paper OP/02/3, Washington: IMF, Monetary and Exchange Affairs Department.
Miles, William, 2003, The Role of Non-Bank Financial Intermediaries in propagating Koreas financial crisis,
Review of Pacific Basin Financial Markets and Policies, 6(1), World Scientific Publishing Co. and Center for
PBBEF Research.
Misun, Jan / Tomsik, Vladimir, 2002, Does Foreign Direct Investment Crowd in our Crowd out Domestic
Investment?, Eastern European Economics, 40(2), March-April 2002: 38-56. Outreville,
J. Francois, 1990, The economic significance of insurance markets in developing countries, The Journal of Risk and
Insurance, 57(3): 487-498.
Outreville, J. Francios, 1996, Life Insurance Markets in Developing Countries, The Journal of Risk and Insurance,
63(2): p263 278, American Risk and Insurance Association. Pagano, Marco, 1993, Financial Markets and Growth:

[Shortened Title up to 50 Characters] 8


An Overview, European Economic Review, 37(1): 613-622. Park, Hoon / Borde, S. F. / Choi Y., 2002, Determinants
of Insurance Pervasiveness: a Cross-national Analysis, International Business Review, 11: p79 86.
Poterba, James / Venti, Steven / Wise, David, 2003, Personal Retirement Saving Programs and Asset Accumulation,
NBER Working Paper 5599.
Pye, Robert B. K., 2003, The Evolution of the Insurance Sector in Central and Eastern Europe (CEE) and the Newly
Independent States (NIS) of the former Soviet Union, Research Paper presented to the IX Dubrovnik Economic
Conference on Banking and the Finanical Sector in Transition and Emerging Market Economies.
Raikes, David, 1996, Bancassurance: European Approaches to capital adequacy, Financial Stability Review No. 1,
Bank of England.
Ranade, Ajit / Ahuja, Rajeev, 1999, Insurance, Chapter 15, India Development Report, by Kirit Perikh, Oxford
University Press.
Ranade, Ajit / Ahuja, Rajeev, 2001, Impact on Saving via Insurance Reform, Indian Council for Research on
International Economic Relations, Working Paper 67,
May. Rioja, Felix / Valev, Neven, 2004, Does one size fit all? A re-examination of the finance and growth
relationship, Journal of Development Economics 74: 429-447.
Rivaud-Danset, D., / Dubocage, E, / Salais, R., 2001, Comparison between the financial structure of SMES and that
of large enterprises (LES) using the BACH database, European Commission, Directorate General for Economic and
Financial Affairs.
Rojas-Sures, Liliana / Weisbrod, Steven R., 1995, Financial Fragilities in Latin America: the 1980s and 1990s, IMF
Occasional Paper 132, Washington.
Rousseau, P., L., / Wachtel, P., 1998, Financial Intermediation and Economic Performance: Historical Evidence from
Five Industrialized Countries, Journal of Money, Credit and Banking, vol. 30, pp. 658-678.
Rousseau, P., L., / Wachtel, P., 2001, Inflation, Financial Development and Growth, in Negishi, R. et al. (eds.),
Economic Theory, Dynamics and Markets: Essays in the Honor of Ryuzo Sato, Deventer: Kluwer. Rousseau, P. /
Wachtel, P., 2005, Economic Growth and Financial Depth: Is the relationship extinct already? Paper presented at the
UNU / WIDER Conference on Financial Sector Development for Growth and Poverty Reduction, July, Helsinki.