the relatonship between insurance and economic growth

The Relationship between Insurance and Economic Growth in Bangladesh

A Theoretical and Empirical Analysis
Introduction
Literature Review This article examined the short and long-run relationships between economic growth
and insurance sector development in the Bangladeshi 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

The Relationship between Insurance and Economic Growth in Bangladesh

A Theoretical and Empirical Analysis
Introduction
Literature Review
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

the relatonship between insurance and economic growth 2

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 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 finance-growth 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

the relatonship between insurance and economic growth 3

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.
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.
Objective of the Study
This paper mainly tried to focus on the economic growth- Insurance nexus in Bangladesh. The objectives
of this paper are to : a) Analyse the impact of insurance on economic growth and b) predict future data
using historical data with regression.
Methodology
This research paper is primarily based on historical data and data collected from secondary sources.
Moreover regression techniques is used to predict future data of insurance industry in Bangladesh.
Sources of Data : Information has been collected from the annual report of the concerned companies and
IDRA. Besides that the Insurance Year Book published by Bangladesh Insurance Association was also
utilized to get required information.
*Economic conditipn of Bangladesh

percentage %
GDP
INFLATION
Unemploymen
t

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

the relatonship between insurance and economic growth 4

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.

Premium

Asset

Investment

(million)
Year

2013

2012

2011

2013

2012

2011

2013

2012

2011

Life

6428

6587

6281

2446

2396

2029

1929

1920

1533

Non-Life

0
1250

1
1594

4
1145

80
8589

34
7812

45
5544

00
2298

70
1925

18
2295

Total

5
7678

7
8181

6
7427

5
3305

1
3177

3
2583

3
2158

8
2113

0
1762

75

55

88

83

28

68

Insurance Industry Scenario 2011-13

350000

317755

330575

300000
258388
250000

211328

215883

81818

76785

2012

2013

176268
200000
150000
74270
100000
50000
0
2011
Total Asset

Total Premium

Total Investment

the relatonship between insurance and economic growth 5

We are experiencing positive change in insurance industry. Though there is lack of confidence of people
on insurance industry, but education technological and regulatory improvement are growing confidence
and awareness among people and they are going more for insurance industry. Moreover some more
competitive factor are increasing the industrys asset premium and investment. The analyzation of the
sample size gives us the following finding of those increasing: a) the low level of premium is not
burdensome for people. And now insurance industry is charging lower premium facing competition, b)
industry is offering more competitive product and covering maximum number of peoples demand c)
population is going for more luxurious product with increase of income d) industry is educating more
people to Increase awareness. And the maximum no. of educated people are going more under insurance
coverage e) the improvement in regulatory framework of insurance companies are increasing confidence
of population, f) the improvement of regulation on agent is increasing reliably of people and the premium
is those increasing g) the competition in insurance industry is leading to competitive pricing of insurance
h) Low amount of claim arises: the lower no of claim settlement is also increasing the premium i)
Investment in productive sector: insurance industry is investing more in those sector where the investment
of fund does not only brings profit but also maximizes wealth.

% of Premium to GDP
1
0.69

0.62

0.8

0.55

0.6
0.4
0.21
0.2
0
DATE

0.2

0.19
0

01-01-11
Non Life Premium to GDP

01-01-12

01-01-13

Life Premium to GDP

Investment and Insurance Asset

The essential part of the contribution of insurance companies to GDP growth derives from their assets and
their utilization in the financial markets via investment & the companies set up (what they invest in,
where they invest in and at what maturity) and finally the ability to exploit the differences between moral
hazard & physical hazard defines the companys efficiency and contribution to growth.
Besides insurance investment growth, insurance assets growth could be noticed with a regard to
interaction with economic growth. The assets and liabilities of insurance industries have some differing
from liabilities and assets held by banks and have impact on economy. In Bangladesh, the average deposit

the relatonship between insurance and economic growth 6

is higher than the average premium paid for insurance contracts. Liabilities of insurance companies
depend on the probability of the insured risk and on the unpredictable resulting losses. The financial risks
and liabilities are more uncertain and fluctuations can be higher for insurers than for banks. The
investment policy is focusing on the stability and assets are usually more liquid. Insurance liabilities are
usually of longer term than those of banks. It is true for life insurers, whereas the arising liabilities
continue for many years and sometimes not covered by appropriate investment element. So insurance
have to rely on long term investments and qualified to play a large role in financial markets trading long
term assets. Insurance companies are major investors into shares, bonds, loans and real estate. The total
investment by insurance sector to GDP growth should be major revenue for analyzing insurance growth
nexus. Directly and indirectly insurers provide funds for investment and add to demand for the respective
financial market instruments. Due to higher liquidity, it is much easier for private and institutional
investors to access diversified investment portfolio and to invest in high risk, high productive projects.
Deepening capital markets: Insurance companies play a major role on stock and bond markets, analyzing
the impact of insurance investment by category on the economy is a further area to explore.in line with
the discussion about intermediaries holding assets the positive influence of the increased capital
mobilization, the pressure on the domestic interest rate and the advantage of institutions of scale
monitoring companies. Efficiency improvement in the insurance market can put additional pressure on to
other financial intermediaries and improve the contribution of the financial sector to real growth.
Generally insurance companies invest in every sector with lower risk and higher return. They invest their
funds in overseas and also in country. The main focus in on the risk and return of the fund invested.
Sectors of investment are:
Statutory reserve with Bangladesh Bank, Bangladesh Government Treasury Bonds, Corporate Bonds,
Security market, Short term investment in financial institutions., Foreign Direct Investment, Secured and
convertible bond (NPS), House property, Jatiyo biniog bond.
The insurance companies mostly invest in share market. The approximate percentage of share investment
is 70% - 85% of their total investment. The insurance companies keep statutory reserve with Bangladesh
Bank to 1% - 2% of their total investment. They also invest the significant portion of their investment in
Bangladesh Government Treasury Bonds. They also invest in the other sector

the relatonship between insurance and economic growth 7

0.08
0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.01
0.02
0.01
0
2011

0
0.02

0
0.02

2012

2013

Non Life Investment to GDP

Life Investment to GDP

Empirical Analysis
Regression Analysis
To show how GDP is related to premium and investment of insurance in Bangladesh, regression
techniques is used to provide an empirical analysis. Most papers reviewed utilize simple OLS Regressions
or Granger Causality Tests and mainly test for the determinants of insurance demand. Since the main
focus of this paper is to test for insurance services as a main indicator for economic growth, we had to
vary from the standard approach and adopted a framework mainly used in other finance-growth nexus
analysis. Following Eller (2005), Fink (2004, 2005) or Webb, Grace & Skipper (2002) we adopted a
endogenous growth model with a modified Cobb-Douglas production function assuming constant returns
to scale and perfect competition.

the relatonship between insurance and economic growth 8

Regression
16000000
14000000
f(x) = 513.03x - 20173417.85
12000000
R = 0.18
10000000
8000000
6000000
4000000
2000000
0
64000 64500 65000 65500 66000 66500 67000 67500

Estimation Results
The estimation output is summarized in following table and using current or lagged values of either total
premium income or a specific premium income does not change the results. The coefficients for physical
capital and the constant remain significant and show the expected sign. Human development seems to be
negatively connected to GDP growth, but the coefficient is near zero and is as the interest and the
inflation rate not significant. The sign of the coefficients for premiums vary. Whereas total insurance and
non-life insurance consumption seems to enter negatively, life insurance premium income has a positive
effect. But in all cases the premium income lacks significance.
*Time Series Graph

year

GDP

MA(4)

CMA

St, It

St

Deseason

13611

sts
131614

(4)

Tt

foreca

2001

271732

0.9669

alize
2810241.2

2002

9
270533

38
1.9669

1375402.3

45
13120

3
258072

2003

1
290603

283723

290770

0.9994

38
2.9669

979473.5

52
12629

5
374711

2004

7
302022

0
297817

3
312283

27
0.9671

38
3.9669

761348.7

58
12138

9
481532

2005

3
328111

7
326749

4
343365

42
0.9555

38
4.9669

660591.1

65
11647

7
578534

the relatonship between insurance and economic growth 9

2006

5
386258

1
359981

2
408894

76
0.9446

38
5.9669

647331.7

72
11156

8
665718

2007

8
423532

4
457806

0
514660

43
0.8229

38
6.9669

607918.1

78
10665

3
743083

2008

8
693323

6
571514

6
637710

36
1.0872

38
7.9669

870250.4

85
10174

0
810629

2009

1
782944

7
703907

9
782866

06
1.0001

38
8.9669

873145.3

91
96839

1
868356

2010

0
915828

2
861825

1
925025

0.9900

38
9.9669

918866.8

8
91930

5
916265

2011

8
105520

0
988225

0
105831

58
0.9970

38
10.966

962168.3

4.6
87021

2
954355

2012

40
119892

0
112840

63
120312

59
0.9965

94
11.966

1001863.0

1.2
82111

2
982626

76
127785

90

04

2013

32
134367

94
12.966

1036231.1

7.8
77202

5
100107

44
151359

03

2014

94
13.966

1083701.9

4.4
72293

92
100971

2015

97

94
14.966

0.9
67383

32
100852

2016

94
15.966

7.5
62474

85
997525

2017

94
16.966

4.1
57565

1
976703

2018

94
17.966

0.7
52655

0
946062

7.3

94

the relatonship between insurance and economic growth 10

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 has also risen; thus the likely impact of insurance onto the economy should have gone
up. On the other hand, the strength of the bank/stock finance-growth-relationship found in empirical
studies, which used mainly pre- data seems to have diminished in more recent years. Could the
weakening of this seemingly robust finance-growth relationship that drove so much of policy
recommendations be caused, among others, by the very growth of the insurance sector and its respective
role? If there is a causal and strong relationship running from the insurance sector onto economic growth,
and/or if the insurance muscle weakens formerly important bank and capital market channels for growth,
this would lead to numerous policy recommendations, for example in sequencing of reforms in transition
and emerging markets and in priorities for financial market development. So we analyzed the various
channels of influence of the insurance sector vis--vis economic growth: risk transfer (bearing risk for
other economic agents which might stabilize their income streams, dampen volatility and enhance
economic activity), substitute savings (broadening the investment range might make intermediation more
efficient and thus aid in economic growth), investment (e.g. increasing over-all investment volumes and
deepening capital markets), institutional spheres of influence (e.g. banc assurance) and possible sources
of contagion and repercussions to the economy. We also provide descriptive evidence on the magnitude
and development of the insurance sector vis--vis other financial sectors in Bangladesh. Next, we review

the relatonship between insurance and economic growth 11

the literature for models on the insurance-growth-nexus and for empirical investigations. Although the
number of empirical analyses is quite low and lags miles behind the multitude of studies about other
growth channels, there seemed to be at least weak evidence that GDP, interest rate and inflation rate are
correlated to insurance consumption. After identifying various possibilities to measure the impact of the
insurance sector, we develop a modified production function to empirically investigate our endogenous
insurance-growth model. The empirical analysis of a panel data set of Bangladesh for the periods is used
to estimate the coefficients and the significance of each input factor, but results showed no evidence for a
correlation between aggregate insurance premium income and GDP growth. Our findings add to the
mixed picture found in the literature review and resemble the same weak link found in the bank/stock
finance-growth-relationship in recent year. Most of the growth of the aggregate insurance sector over the
last decade in Bangladesh was in the life insurance branch. We thus conclude that the mild evidence we
find on the impact running from life insurance premium to economic growth might be supporting the
assumption that an expanding insurance sector is weakening the bank/stock finance-growth-nexus.
Clearly, more research on the various channels is necessary. Similar to findings on the bank-growthnexus, there could also be threshold effects at work, calling for analyzing country groups of more
homogeneous insurance intermediation than done here. We conclude that there is a good theoretical point
for the insurance sector influencing economic growth (and vice versa), but only weak empirical evidence
as of yet. Our empirical findings point to future possibilities in investigating the nexus further by using
different indicators for insurance engagement and model setup and longer time periods. The disparity
between the importance of the insurance sector for the finance-growth nexus and acknowledgement
received from researchers up until now prompts us to recommend conducting further investigation, which
would help to eliminate essential knowledge gaps in macroeconomic theory and answer why the financegrowth-nexus seems to be have become less robust on more recent data.

the relatonship between insurance and economic growth 12

References
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.

the relatonship between insurance and economic growth 13

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.
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:
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.

the relatonship between insurance and economic growth 14

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.

the relatonship between insurance and economic growth 15

the relatonship between insurance and economic growth 16

the relatonship between insurance and economic growth 17