Life Insurance Development and Economic Growth:

Evidence from Developing Countries

Idrissa Ouedraogo, Samuel Guérineau, Relwende Sawadogo

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CENTRE D'ETUDES
ET DE RECHERCHES
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INTERNATIONAL

SÉRIE ÉTUDES ET DOCUMENTS

Life Insurance Development and Economic Growth: Evidence from

Developing Countries

Idrissa Ouédraogo
Samuel Guérineau
Relwendé Sawadogo

Études et Documents n° 16

October 2016

To cite this document:

Ouédraogo I., Guérineau S., Sawadogo R. (2016) “Life Insurance Development and Economic
Growth: Evidence from Developing Countries”, Études et Documents, n° 16, CERDI.
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 Études et Documents n° 16, CERDI, 2016

The authors

Idrissa Ouédraogo, Professor, CEDRES - Université Ouaga 2, Burkina Faso.

E-mail : [email protected]

Samuel Guérineau, Associate Professor, CERDI – Clermont Université, Université d’Auvergne,

UMR CNRS 6587, 65 Bd F. Mitterrand, 63009 Clermont-Ferrand, France.
E-mail: [email protected]

Relwendé Sawadogo, Ph.D in Economics, Temporary Teacher and Researcher, CERDI –

Clermont Université, Université d’Auvergne, UMR CNRS 6587, 65 Bd F. Mitterrand, 63009
Clermont-Ferrand, France.
E-mail: [email protected]

Corresponding author: Relwendé Sawadogo

This work was supported by the LABEX IDGM+ (ANR-10-LABX-14-01) within the
program “Investissements d’Avenir” operated by the French National Research
Agency (ANR).

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2
 Études et Documents n° 16, CERDI, 2016

Abstract

This article examines the relation between the development of life insurance sector and
economic growth, for a sample of 86 developing countries over the period 1996-2011. We
also examine the heterogeneous effect of life insurance on growth. The econometric results
show on the one hand that the development of life insurance has a positive effect on
economic growth per capita and, on the other hand, that this effect varies according to the
structural characteristics of countries. Thus, the marginal positive impact of the
development of life insurance decreases with the levels of deposit interest rate, bank credit
and stock market value traded, while the effect is greater in countries with high-quality
institutions. Finally, life insurance effect on growth is less for SSA and British legal system
countries, compared to non-SSA and non-British legal system countries.

Keywords

Life insurance market, Economic growth, Developing countries.

JEL codes

G22; O11; O57

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 Études et Documents n° 16, CERDI, 2016

1. Introduction

In the course of recent years, insurance sector in particular its life branch, in developing
countries knows an increase even if the level of development of this one remains low
comparatively to developed countries. Indeed, life insurance penetration in economy (life
insurance premiums total volume as a percentage of GDP) of low and middle income
countries rose from 0.19% of GDP in 1996 to 0.30% in 2011, while at the world level, it rose
from 0.43% to 0.70 and this one of high-income countries 2.01 percent to 2.20 in the course
of the same period1.Thus, life insurance premiums have increased by 60.21% in low and
middle income countries, while it has increased that 9.43% in high-income countries for
period 1996 to 2011. This shows that the relative share of life insurance sector in domestic
economy increases faster in developing countries than at the world level and at developed
countries level.

Development of life insurance sector like all the financial intermediaries has a significant
training effects on economy. Life insurance companies all as the contractual savings
institutions, in addition to offer a social protection to economic agents, are specialized in
mobilization of domestic savings from many small investors; and to channel it to productive
investment opportunities (Dickinson, 2000). In addition, the insurance companies all as
mutual fund companies of investment and retirement are the largest institutional investors on
the stock, bond and real estate markets (Haiss and Sümegi, 2008). For example, life insurance
companies as investment vehicle, incite to a higher level of specialization and professionalism
of the part of financial market participants (enterprises and financial institutions). This allows
to finance the projects that are more daring, to exploit the economies of scale by reducing the
transaction costs and to encourage the financial innovation (Catalan et al., 2000; Impavido et
al., 2003). In this context, it is interesting to know if the development of life insurance sector
contributes to economic growth in developing countries.

Furthermore, since first session in 1964, UNCTAD formally acknowledged that “a sound
national insurance and reinsurance market is an essential characteristic of economic
growth2”. In the stride, the economic literature (Ward and Zurbruegg, 2000; Webb et al.,
2002; Kugler and Ofoghi, 2005) has shown that the economic growth and the development of

1
Martin Čihák, Aslı Demirgüç-Kunt, Erik Feyen, and Ross Levine, 2012. "Benchmarking Financial Systems
Around the World." World Bank Policy Research Working Paper 6175, World Bank, Washington, D.C.
2
Proceedings of the United Nations Conference on Trade and Development (1964), Final Act and Report, p.55,
annex A.IV.23.

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 Études et Documents n° 16, CERDI, 2016

insurance sector are interdependent and that an economy without insurance services would be
much less developed and stable. Indeed, a sector of insurance more developed and in
particular life insurance provides long and stable maturity funds for development of public
infrastructure and at the same time, reinforce the country's financing capacity (Dickinson,
2000).

However, until now, most of the empirical works on financial sector have focused more on
effect of banking sector and stock market on economic growth (Beck and Levine, 2004).
Although, the literature (Skipper, 1997) has highlighted the contribution to life insurance
sector on economic growth, it has hardly been studied empirically especially in developing
countries and those with low-income. The empirical studies on impact of the development of
life insurance sector on growth are more focused on developed and emerging countries (Ward
and Zurbruegg, 2000; Webb et al., 2002; Arena, 2008; Avram et al. 2010; Chen et al. 2012;
Lee et al, 2013; etc.).

In this context, the goal of this paper is to contribute to literature, by assessing the empirical
effect of the development of life insurance on economic growth and to highlight heterogeneity
of life insurance effect among countries. Thus, the sample is constituted of 86 developing and
emerging countries3 over the period 1996-2011. Firstly, we use a linear model to analyze the
direct effect of life insurance premiums on real GDP per capita growth and secondly, we test
the presence of non-linearity in impact of life insurance penetration. To accomplish this task,
the regressions are realized by the method of instrumental variables developed by Baum et al.
(2007) in order to overcome at best the endogeneity bias that arise from reverse causality and
/ or omitted variables. Thus, we used the percentage of the Muslim population and life
insurance penetration lagged two periods as instruments of the development of life insurance.
In addition, the legal origin code is used as instrument for banking and stock market variables
in non-linearity model.

The contribution of this study to empirical literature is at two levels. Firstly, this study
provides empirical evidence to literature on the relationship between life insurance and
economic growth by using a much larger sample of developing countries compared to
previous studies (Webb et al., 2002; Arena, 2008 and Chen et al, 2012). Secondly, we
highlight the presence of heterogeneity in impact of the development of life insurance on
growth by including interaction variables. This allows us to go beyond the direct effect and to

3
The choice of the sample size has been driven by the availability of the data over a long period.

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 Études et Documents n° 16, CERDI, 2016

analyze the conditional effects of impact of the development of life insurance on the
economic growth in developing countries. These conditional variables are financial, income,
regional and institutional. Thus, the conditional coefficients will allow also to know if life
insurance effect is mitigated (negative coefficient) or magnified (positive coefficient) by these
conditional variables.

The rest of the paper is organized as follows. Section 2 provides a brief review of empirical
literature on the relationship between the development of life insurance market activity and
economic growth. The section 3 presents the methodology of estimation and the different
variables of this study. Section 4 presents and discusses our main results, while Section 4
concludes and draws some policy implications.

2. Review of the relationship between life insurance and economic growth

literature.

In this section we shed light on the role of life insurance and its contribution to economic
development and we do an overview of the main empirical conclusions by having analyzed
the relationship between the development of life insurance and economic growth. A more
detailed listing can be found in Appendix A-1.

Regarding to the life insurance supply, the existing studies (Skipper, 1997; Skipper and
Kwon, 2007; Arena, 2008) have showed that the insurance industry contributes to economic
growth. Indeed, insurance activity encourages the economic development through various
channels: it reduces the costs of the necessary financing for firms, stimulates the investments
and innovation by creating an economic environment that is more certain; insurers are strong
partners in development of a social protection system of workers, in particular in the
retirement and health coverage and as institutional investors, the insurers also contribute to
the modernization of the financial markets and facilitate the accumulation of new capital by
firms (Skipper, 1997; Dickinson, 2000; Skipper and Kwon, 2007; Njegomir and Stojić, 2010).

The empirical literature on the relationship between financial development and economic
growth is more focused on banking development and financial market (Levine, 1998 and
1999; Levine and Zervos, 1998; Levine et al., 2000; Beck and Levine, 2004). Some research
on the link between the economic growth and life insurance development are more concerned
by the effects of growth on the consumption of life insurance rather than the inverse
relationship (Outreville, 1996; Enz, 2000; Beck and Webb, 2003; Chang and Lee, 2012).

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 Études et Documents n° 16, CERDI, 2016

The literature has analyzed the role of life insurance on economic growth from several angles.
First, there are studies which properly are concerned with the causality between life insurance
premiums and economic growth. Thus, Ward and Zurbruegg (2000) indicate that in long run,
there is a bidirectional causal relationship between real insurance premiums and real GDP for
Australia, Canada, Italy, and Japan, whereas a unidirectional causality exist from real GDP to
real insurance premiums for France. In interpreting the findings, the authors refer to cultural
predispositions towards uncertainty avoidance (Hofstede, 1995; Fukuyama, 1995) and
resulting propensity for insurance and the effects of regulation for explain this situation.
Kugler and Ofoghi (2005) analyzed also the causality between insurance premiums and
economic growth on the period 1966-2003 for United Kingdom. Through the Johansen
cointegration test, they highlight a causality running from insurance to economic growth.
Then, Webb et al. (2005) also found a bidirectional causality between life insurance and
economic growth for a sample of 55 developed and emerging countries. By using a vector
error correction model (VECM), Vadlamannati (2008) analyzed the short-run causality
between life and non-life insurance and economic growth in India and indicated there is a
bidirectional causality between life insurance sector and economic growth. In contrast, Adams
et al. (2009) provided evidence of unidirectional causality running from insurance to
economic growth, but with no reverse effect, in the case of Sweden. Finally, Lee et al. (2013)
have used the cointegration technique to examine the relationship between life insurance
premiums and growth in 41 countries according to their economic development level during
the course of the period 1979-2007. The results show that there is a relationship of long-term
equilibrium between real GDP per capita and life insurance demand. Thus, the estimated
long-term results indicate that life insurance demand contributes positively to real GDP
growth. Then, they also show the presence of bidirectional causality between life insurance
premiums and economic growth at short-term and long-term.

In addition to the studies on the causality between life insurance premiums and economic
growth, there are those which have analyzed the empirical impact of the development of life
insurance on economic growth. Thus, Avram et al. (2010) have examined the relationship
between insurance and economic growth over the 1980-2006 period using both Ordinary
Least Squares (OLS) on cross-sectional data and Generalized Method of Moments (GMM)
estimations on panel data. They found a positive effect of the insurance (life and non-life) on
growth. They also show that at the disaggregated level, life insurance and non-life premiums
per capita have a positively influence on economic growth. Then, Hou et al. (2012) have

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 Études et Documents n° 16, CERDI, 2016

studied the impact of financial institutions on economic growth on a panel of 12 European

countries during the period 1980-2009. They use a fixed effects model and find that life
insurance development and banking activity are important determinants of economic
development. Finally, Keke and Houedokou (2013) have analyzed the contribution of
insurance (life and non-life insurance) to economic growth in WAEMU1 countries during the
period 1999-2009. They also made a comparative analysis between the results of WAEMU
countries and those of CEMAC2. The estimation of a dynamic panel grouping all the countries
of the African Franc Zone did not provide clear results on the contribution of insurance sector
to economic growth. Furthermore, the results conclude that there is no significant effect of life
insurance on economic growth in the WAEMU and CEMAC zone, while the non-life3
insurance has a significant effect.

Regarding the empirical analysis of nonlinear effects of life insurance on economic growth,
Arena (2008) has showed that life insurance positively influences economic growth in 56
countries (both developed and developing). More specifically, he establishes that impact of
life insurance on economic growth is driven by high-income countries only. Furthermore, the
results indicate that the financial development and insurance sector have complementary
effects on economic growth. In other terms, life insurance has a bigger impact on economic
growth in country with stock market development deeper, particularly for intermediate and
high stages of stock market development. As regards Chen et al. (2012), they have analyzed
life insurance effect on economic growth and the conditions factors that affect the relationship
between life insurance market and economic growth. Thus, the insurance-growth nexus varies
across countries with different conditions. For example, the positive impact on economic
growth is mitigated in middle-income countries, but amplified in low-income countries.
Moreover, both the development of stock market and life insurance market are substitutes
rather than complements.

Our study is in continuity of two previous studies (Arena, 2008 and Chen et al., 2012) by
adopting the same methodology but differs in several levels. First, this study goes beyond that
of Chen et al. (2012) by introducing the variables of the institutions quality and legal
environment to analyze the heterogeneities. Indeed, the taking into account of the institutions

1
WAEMU: West Africa Economic and Monetary Union includes Benin, Burkina Faso, Ivory Coast, Mali,
Niger, Senegal, Togo and Guinea-Bissau.
2
CEMAC: Central African Economic and Monetary Community includes Cameroon, Congo, Gabon, Equatorial
Guinea, Central African Republic and Chad.
3
Or IARD: Fire, Accident and Risk Various

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 Études et Documents n° 16, CERDI, 2016

quality as conditional factors is justified by the fact that the effect of institutional environment
on the development of life insurance in high-income economies is not as significant as those
in low-income economies (Outreville, 2008). Thus, according Outreville (2008), the quality of
institutions has more effect in developing countries than in developed countries. Hence, the
interaction variable between life insurance premiums and institutions quality also allows to
capture to what extent the marginal effect of life insurance premiums is influenced by the
quality of institutional environment. Secondly, unlike studies of Arena (2008) and Chen et al
(2012) we use a larger sample of developing countries and a relatively long period (1996-
2011) to take advantage on maximum information contained in the data. Finally, at the
estimation method level, we use technique of instrumental variables (IV/GMM) developed by
Baum et al (2007) that is robust in the presence of heteroscedasticity of the errors.

3. The econometric strategy and data

3.1. The econometric model and estimation method

Our empirical strategy to test the effect of the development of life insurance on economic
growth, uses the methodology by Beck and Levine (2004) to analyze the empirical
relationship between banks, stock markets and economic growth. Thus, our regression
equation of growth is defined as follows:

Yi,t − Yi,t−1 = α ∗ Yi,t−1 + β ∗ INSi,t + δ′ ∗ Xi,t + η𝑡 + εi,t (1)

Where (Yi,t − Yi,t−1 ) is real GDP per capita growth4, X represents a vector of control variables
(population growth5, index of human capital, domestic investment, inflation, government
consumption, openness to trade and terms of trade), Yi,t−1 , the logarithm of initial GDP per
capita to control the conditional convergence effect of the standard Solow-Swan growth
theory and INS is life insurance penetration6 defined as ratio of life insurance premiums to
GDP. ηi is time fixed effects, εi,t is the idiosyncratic error term and the subscripts i= 1,…, N
yt−yt−1
4
We use the following approximation to calculate the real GDP per capita growth between t et t − 1 : =
yt
∆yt
≅ Ln(yt ) − Ln(yt−1 ).
yt
5
According to literature on growth regressions to Solow, authors such as Mankiw et al. (2002), Caselli et al.
(1996) or Hoeffler (2002) make assuming of a rate of technical progress and of a depreciation rate of the
physical capital constants, the sum of which is 𝜌 + 𝑑 = 0.05. This is why the variable of population used in the
regressions is actually the logarithm of the sum of the population growth rate and 0.05.
6
We also study an alternative measure of insurance development commonly used in the literature, life insurance
density, to test the robustness of our results.

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 Études et Documents n° 16, CERDI, 2016

and t= 1,…, T represent country and time period, respectively. In equation (1), β is our
coefficient of interest and allows to determine the direct effect of life insurance premiums on
economic growth. We anticipate a positive sign for β. Furthermore, the convergence
hypothesis between the economies studied suggests that the coefficient (α ) of Yi,t−1 is
negative and significant in our growth model, ie 0 < 1 + α < 1.

To examine the heterogeneity for the effect of life insurance on economic growth, we specify
an augmented version of equation (1) as follows:

Yi,t − Yi,t−1 = α′ ∗ Yi,t−1 + β′ ∗ INSi,t + ρ ∗ [INSi,t ∗ Mi,t ] + γ ∗ Mi,t + θ′ ∗ Xi,t + η′t

+ εi,t (2)

Where Mi,t represents the conditional variables of country-specific structural characteristics

which are financial, economic development level, region and institutions quality and legal
system.

The four categories of conditional variables defined above include variables described as
follows: first, to determine whether the effect of life insurance demand on growth is
influenced by the development of local financial institutions, we retain the private credit by
deposit money banks to GDP, interest rate of bank deposits and stock market total value
traded to GDP. Indeed, insurance market activity cannot only contribute directly to economic
growth, by itself but also through complementarities with banking sector and stock market.
Thus, by reducing information and transaction costs, pooling risk, enhancing financial
intermediation through the channeling of savings to domestic investment, and fostering a
more efficient capital allocation through the gathering of substantial firm information,
insurance activity may contribute to reinforcing the process of resource allocation done by
banks and capital markets (Arena, 2008). In contrast, life insurance sector activity may have a
substitution effect with banking sector in the mobilization of savings by reducing the market
shares of other financial systems particularly in developing countries (Allen and Santomero,
2001). Then, heterogeneity related to the economic development level is proxied by income
per capita of country. Thus, we introduce dummies for Low and Middle income (LMY) and
for Upper Middle income (UMC). Regional condition variables are defined by the dummies
of Sub-Saharan Africa (SSA), Europe and Central Asia (ECA), Latin America and Caribbean
(LAC), Middle East and North Africa (MNA), South Asia (SAS) and East Asia and Pacific
(EAP). Finally, last category of conditional variable measures the institutions quality that are
bureaucratic quality, control of corruption and Law and order. In addition to these institutional

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 Études et Documents n° 16, CERDI, 2016

indicators, we capture the overall effect of the institutions quality by the average of these
three indicators (IQ). But before introducing these indicators in econometric estimates, we
normalize them on a scale of 0-1 in order to facilitate the calculation of the composite index
of the institutions quality (IQ) and comparisons of the different equations. A higher score
represents a better institutional quality. We also analyze the effect of legal environment, by
introducing the dummies for British legal system (British) and french (French).

From the equations (1) and (2), the marginal effect of life insurance premiums on economic
growth can be determined as follows:

∂(Yi,t − Yi,t−1 )
= β (3)
∂INSi,t

∂(Yi,t − Yi,t−1 )
= β′ + ρMi,t (4)
∂INSi,t

Equation (3) is obtained from equation (1) and aims at measuring the direct effect of life
insurance premiums on growth (β). Equation (4) result of the equation (2); the term (ρMi,t )
represents the indirect effect and (β′ + ρMi,t ) is the marginal effect of the development of life
insurance on economic growth. More specifically, if β′ > 0 and ρ < 0 then life insurance
development has a positive link with economic growth and a negative coefficient for the
variable Mi,t apparently reduces positive impact of the particular life insurance development
on economic growth. On the other hand, if β′ > 0 and ρ > 0, then the conditional variable
Mi,t favorably affects that positive impact of the development of life insurance.

The estimate of the influence of life insurance premiums on growth (equation 1 and 2) by
OLS estimator raises a number of problems of which the most important constitutes the
endogeneity bias. Indeed, this problem may originate from a number of sources. The
existence of a correlation between the dependent variable lagged and individual effects leads
OLS estimators biased and not convergent. Also in the case of reverse causality or omission
of variables, OLS estimator is inconsistent and biased. To face these problems, we draw on
instrumental variables techniques and thus on several instruments to estimate the impact of
the life insurance activity on economic growth. Thus, we instrument the development of life
insurance by the percentage of the Muslim population and the value of life insurance
premiums lagged two years. Indeed, previous studies have shown that Muslims believe that
the purchase of life insurance is inconsistent with the Koran. Thus, they have found that the
proportion of Muslim population has a negative and significant effect on the demand for life

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 Études et Documents n° 16, CERDI, 2016

insurance (Browne and Kim, 1993; Webb et al. 2002; Ward and Zurbruegg, 2002; Beck and
Webb, 2003; Feyen et al, 2011).

However, even whether there are mechanisms to circumventing to formal assurance in the
Muslims countries through the creation of Islamic insurance as Takaful insurance, we always
note that in these countries a low consumption of life insurance. Thus, we think that the
instrument is relevant. Then, by basing on work of Laporta et al. (1998), we use legal origin
system dummy (English or French) as instruments of banking and stock market variables in
our equation (2). In addition, life insurance indicator lagged two years and conditional
variable is also used as instrument in our augmented equation (2). Thus, the equations (1) and
(2) are estimated with the heteroskedastic-efficient two-step generalized method of moments
(IV-GMM) estimator developed by Baum et al (2007), which generates efficient coefficients
as well as consistent standard errors estimates. Indeed, the advantages of IV-GMM over IV
are clear: if heteroskedasticity is present, the IV-GMM estimator is more efficient than the
simple IV estimator, whereas if heteroskedasticity is not present, IV-GMM estimator is no
worse asymptotically than the IV estimator (Baum et al. 2007).

3.2. Definition of data sources and statistical analyses

The data used in this study are annual data from 1996 to 2011 for 86 developing countries
(see Appendix A-4 for countries list). Our main variable of interest, life insurance premiums
total value to GDP measures the penetration of insurance activity in economy, and is obtained
from the database «Benchmarking Financial Systems Around the World» of Čihák et al.
(2012). To test, the robustness of our results, we have recourse to life insurance premiums per
capita (life insurance density)7 as an alternative measure of the consumption of life insurance.
The financial condition variables such as the bank credit to private sector and rate of stock
market transaction and bank deposit interest rate, also come from Čihák et al. (2012). Real
GDP per capita growth defined by the logarithm difference of real GDP per capita is extracted
from World Development Indicators (2014) compiled by the World Bank. Similarly,
population growth, inflation rate, government consumption, openness to trade, terms of trade,
dummies of the economic development level (Low and Middle income = LMY and Upper
Middle income = UMC) and regional dummies (Sub-Saharan Africa, Europe and Central

7
Life insurance density is calculated starting from the penetration of life insurance and real GDP per capita.

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 Études et Documents n° 16, CERDI, 2016

Asia, Latin America and Caribbean, Middle East and North Africa, South Asia and East Asia
and Pacific) all taken from World Development Indicators. The human capital index is
derived from Penn World Table 8.0. Finally, the variables of the institutions quality condition
are extracted from International Country Risk Guide (CGRI) database, (2013) Appendix A-2
presents full definitions and sources of the different variables.

The table 1 presents descriptive statistics of our variables in basic model. There is
considerable variation in share of life insurance premiums in GDP across countries, ranging
from 0.001% in Albania (average 1996-2011) to 15.784% in South Africa (average 1996-
2011). Real GDP per capita growth also shows variation, ranging from -0.165 in Madagascar
to 0.2854 in Azerbaijan (both for 1996-2011). Most of the control variables also presents
disparities between countries in the period.

Table 1: Summary statistics

Variables Obs Mean Std. Dev. Min Max
GDP per capita growth 1273 0.02496 0.0417 -0.1658 0.2854
Life insurance premiums (%GDP) 1286 0.76992 1.6402 0.001 15.784
Log( Initial GDP per capita) 1278 7.6326 1.3157 4.8638 12.556
Log (Population growth) 1237 0.5206 0.7726 -6.1170 2.8544
Index of Human capital 1087 2.2926 0.4877 1.1355 3.2680
Domestic Investment (%GDP) 1357 23.368 7.2737 4.142 57.991
Log (1+Inflation) 1299 2.8481 0.5252 -1.5977 8.332
Log (Government consumption) 1254 3.2229 0.3677 -0.5942 4.0631
Log (Degree of openness) 1334 4.2722 0.4702 2.7035 5.3954
Log (Terms of trade) 1315 4.6233 0.3292 3.3044 6.2480

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 Études et Documents n° 16, CERDI, 2016

4. Results of the estimates and discussions

4.1. Results of the basic model

Our results show that the development of life insurance activity is an important determinant of
economic growth on the sample of 86 developing countries over the period 1996-20118. The
diagnostic tests on the efficient of IV-GMM estimator are presented in table 2 below. The
quality of the instruments is validated by the statistics of Fisher and Hansen over-
identification test of the first stage estimation results. Thus, the diagnostic test validates the
instruments used.

Columns 1 to 4 of the table 2 indicate the results of life insurance penetration effect by
controlling the other determinants of economic growth. We note that whatever the
specifications, life insurance penetration has a positive and significant effect on real GDP per
capita growth. This result suggests that life insurance demand contributes to economic growth
in our sample of developing countries. Indeed, in terms of impact, the coefficient is between
0.0011 and 0.0017. Thus, on the basis of results of complete empirical model (column 4), an
increase in one standard deviation in life insurance premiums to GDP, ceteris paribus, would
imply an increase of 0.2132% in economic growth. This result is consistent with the
theoretical of financial development of Patrick (1966) based "supply-leading" which
stipulates that the financial development improves the economic growth. Thus, the insurance
companies as well as mutual fund investment and pensions constitute one of main institutional
investors in the stock, bond and real estate market that induce the economic growth. The
results also confirm empirical studies that found that the development of life insurance
significantly influences economic growth (Outreville, 1996; Webb et al., 2002; Arena, 2008;
Haiss and Sümegi, 2008; 2008; Han et al. 2010; Lee, 2010; Chiu and Lee, 2012; Lee et al.,
2013; etc.).

Regarding the control variables, real GDP per capita initial, population growth, inflation,
degree of openness and terms of trade have negative effects on economic growth while the
human capital and domestic investment positively influence the economic growth. Thus, the
negative effect of the population is in conformity with the growth theory of Solow (1956)
which stipulates that population growth reduced the quantity of capital per capita and

8
We do not test the stationarity of variables because the time dimension is small (16 years) and according to
Hurlin and Mignon (2006) for that the problematic of stationarity presents an interest, the time dimension of the
panel must exceed 20 years.

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 Études et Documents n° 16, CERDI, 2016

therefore the product per capita. Moreover, the positive effect of human capital is in
conformity with that found by Barro (1997) and suggests that an increase of investment in
human capital is a growth stimulating factor. However, negative effect of Degree of openness
and the terms of trade is against intuitive and which may be explained by the fact that the
developing countries are more dependents of the imports.

Table 2: Base line: Two-step IV/GMM estimation of life insurance penetration impact
on Economic growth
Dependent Variable: GDP per capita growth
VARIABLES (1) (2) (3) (4)
Life insurance premiums (%GDP) 0.00128*** 0.00119*** 0.00173*** 0.00136***
(0.000418) (0.000410) (0.000572) (0.000453)
Log (Initial GDP per capita) -0.00669*** -0.00688*** -0.00685*** -0.00657***
(0.00124) (0.00119) (0.00131) (0.00133)
Log (Population Growth) 9 -0.00731*** -0.00753*** -0.00765*** -0.00707***
(0.00158) (0.00156) (0.00163) (0.00150)
Index of Human capital 0.0129*** 0.0131*** 0.0136*** 0.0135***
(0.00338) (0.00329) (0.00354) (0.00351)
Domestic Investment (%GDP) 0.00169*** 0.00166*** 0.00179*** 0.00166***
(0.000205) (0.000200) (0.000209) (0.000194)
Log (1+ Inflation) -0.00987** -0.00801* -0.00995**
(0.00398) (0.00467) (0.00450)
Log (Government consumption) -0.00430 -0.00459
(0.00366) (0.00346)
Log (Degree of openness) -0.00552**
(0.00253)
Log (Terms of trade) -0.0101**
(0.00469)
Constant 0.00751 0.0373** 0.0417*** 0.106***
(0.0113) (0.0152) (0.0156) (0.0280)
Year FE Yes Yes No Yes
Observations 795 771 736 702
R² Centered 0.318 0.332 0.228 0.352
Hansen J, p-value 0.3748 0.5120 0.3983 0.8281
First-stage F-statistic 477.601 589.089 666.607 640.773
(p-value) 0.0000 0.0000 0.0000 0.0000
Note: Life insurance variable is instrumented by percentage of the Muslim papulations and life insurance
penetration lagged two period. Robust standard errors are in parentheses. *Significantly different from zero at
the 10 percent significance level, ** 5 percent significance level, *** 1 percent significance level.

In terms of robustness, we replace life insurance penetration by life insurance density as an

alternative measure of indicator of the development of life insurance. The results are reported
in table 3 below. As previously, we include the control variables to test the stability of the life
insurance density effect on economic growth (columns 1 to 4). Column 4 integrates

9
Referring to Mankiw et al. (1992), Caselli et al. (1996) and Hoeffler (2002), population growth rate has been
adjusted for capital depreciation and growth rate of technical progress, the sum of which worth conventionally
0.05.

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 Études et Documents n° 16, CERDI, 2016

simultaneously all explanatory model as variables previously. We observe that the tests of
diagnostic associated to the specification gives the satisfying results. For example, the statistic
of Fisher Hansen J overidentification test (which is robust to heteroskedasticity) does not
reject the validity of instrumental variables.

Table 3: Robustness: Two-step IV/GMM estimation of life insurance density impact on

Economic growth
Dependent Variable: GDP per capita growth
VARIABLES (1) (2) (3) (4)
Log (1+life insurance per capita) 0.00216** 0.00215* 0.00253** 0.00196*
(0.00104) (0.00118) (0.00123) (0.00107)
Log (initial GDP per capita) -0.00841*** -0.00874*** -0.00890*** -0.00821***
(0.00165) (0.00172) (0.00173) (0.00173)
Log (Population Growth) -0.00672*** -0.00734*** -0.00710*** -0.00648***
(0.00157) (0.00167) (0.00165) (0.00149)
Index of Human capital 0.0124*** 0.0132*** 0.0136*** 0.0137***
(0.00339) (0.00355) (0.00359) (0.00354)
Domestic Investment (%GDP) 0.00165*** 0.00178*** 0.00175*** 0.00161***
(0.000203) (0.000204) (0.000207) (0.000193)
Log (1+ Inflation) -0.00873** -0.00796* -0.00980**
(0.00437) (0.00467) (0.00452)
Log (Government consumption) -0.00382 -0.00409
(0.00366) (0.00346)
Log (Degree of Openness) -0.00592**
(0.00249)
Log (Terms of trade) -0.00909*
(0.00479)
Constant 0.00778 0.0417*** 0.0518*** 0.129***
(0.0131) (0.0147) (0.0167) (0.0306)
Year FE Yes No No Yes
Observations 792 768 733 699
R² Centered 0.318 0.226 0.226 0.351
Hansen J, p-value 0.2879 0.2803 0.2592 0.7002
First-stage F-statistic 65.906 68.791 26.076 83.277
(p-value) 0.0000 0.0000 0.0000 0.0000
Note: Life insurance variable is instrumented by percentage of the Muslim papulations and life insurance density
lagged two period. Robust standard errors are in parentheses. *Significantly different from zero at the 10 percent
significance level, ** 5 percent significance level, *** 1 percent significance level

We generally find the same results as above with life insurance penetration. Indeed, in all the
equations, life insurance density has a positive and significant effect on growth. Thus, in
terms of impact, the logarithm of life insurance density coefficient is between 0.0019 and
0.0025. From column (4), a one standard deviation increase in the logarithm of the life
premiums per capita would increase real GDP per capita growth by 0.3374%. Hence, we
show that the positive impact of life insurance density on growth is conform to previous
studies that have also used the life insurance density, such as those of Avram et al. (2010),

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 Études et Documents n° 16, CERDI, 2016

Lee (2010), Han et al. (2010), Lee and Chiu (2012), Lee et al. (2013), etc. The control
variables also keep their sign as previously which confirms the robustness of our results.
Similarly, initial GDP per capita is also significant.

4.2. Testing for heterogeneity in the life insurance-growth nexus

As shown in the previous analysis, the development of life insurance increases real GDP per
capita growth. In this sub-section, we examined whether the relationship between the
development of life insurance sector and economic growth could be influenced by different
structural characteristics of the country. Thus, in addition to variables of the basic model
(equation (1)), we include the conditional variables (M) and interaction variables (INS x M)
by highlighting the simultaneous effect of life insurance penetration and conditional variables.

4.2.1. Financial development and life insurance effect on growth

Table 4 presents the results of estimation (IV-GMM) in cross-section, by using financial

indicators such as conditional variables. These indicators are private credit by deposit money
banks to GDP (Private credit), stock market total value traded to GDP (Stocktra) and bank
deposit interest rate to measure the financial structure. The coefficients of the interaction term
between life insurance development and financial variables are significant and negative;
suggesting that life insurance development is positively related to economic growth, but the
positive effect is moderated by the private credit and stock market transaction and deposit
interest rate. Indeed, as illustrated in column 1 of Table 4 below, a country in our sample that
sees its deposit interest rate increased by 5 to 10%, the marginal impact of its life insurance
activity on growth decreases from 0.00737 to 0.0073010. Thus, the mitigating effect of interest
rate on the relationship between life insurance and growth is due to the fact that high interest
rates encourage economic agents to do banking investment rather than to subscribe to
contractual savings (life insurance). Furthermore, private credit (column 2) or stock market
transaction (column 3) reduces the positive effect of life insurance penetration on economic
growth. In other words, the results suggest that the development of banking sector or stock
market restrain the marginal impact of life insurance activity on economic growth until it is
neutralized from a certain threshold. For example, regarding the banking system, the threshold
of private credit to GDP from which the marginal impact of life insurance on growth

10∂(Yi,t −Yi,t−1 )
= 0.00738 − 0.00709 ∗ (Deposit interest rate).
∂INSi,t

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 Études et Documents n° 16, CERDI, 2016

neutralizes is 72%11. For the stock market transaction, the threshold is 79.678%. The
substitution effect between life insurance development and other financial segments (banks
and stock market) is not intuitive to the theoretical literature which stipulate a complementary
effect between those financial systems. Moreover, this result is not going towards the same
sense as Webb et al. (2005) and Arena (2008) who have found a complementarity effect
between bank, stock market and life insurance development in a samples of 55 developed and
developing countries. However, unlike developed economies where insurance companies play
an important role in the financial sectors and their importance as providers of financial
services and investment funds in capital markets is very pronounced, there are striking
differences in many developing countries where insurance premiums remain low (Lee,
Huang, et al 2013; Lee et al., 2013). Thus, the situation of low development of life insurance
can explain our findings of substitution effect between life insurance activity and banking
credit in developing countries. In addition, our results confirm the study of Chen et al. (2012)
who have also found the substitution effect between the development of the stock market and
life insurance on the growth process. Then, our results can be also supported by, Haiss and
Sümegi (2008) who have indicated that the life insurance sector expansion can weaken the
banking sector effect on economic growth by reducing the market share of the banking sector
in the mobilization of savings (Allen and Santomero, 2001).

Furthermore, to analyze the direct effect of the three financial segments (insurance, banks and
stock market) on economic growth, we have introduced in addition to life insurance
premiums, other financial indicators in our basic model (equation 5.1 above). Thus, we are
trying to check the previous studies as Webb et al. (2002), Beck and Levine (2004) and Lee
(2010) who also have analyzed the effect of the different financial services on economic
growth. Results show that the development of life insurance sector and stock market has a
positive and significant effect on income per capita growth while bank credit has not
significant impact (column 4 and 5). The results are going to the same direction as the results
of previous empirical studies (Beck and Levine, 2004 and Arena, 2008) who have also found
that life insurance development and stock market have a positive effect on economic growth.
However, bank credit to private sector has a not significant effect on economic growth and is
not conform to Beck and Levine (2004).

∂(Yi,t −Yi,t−1 )
11
The marginal effect of life insurance is determined by = β + ρ ∗ Mi,t , if β and ρ have opposite
∂INSi,t
∂(Yi,t −Yi,t−1 ) β
signs, a threshold level arises = β + ρ ∗ Mi,t = 0 and we have Mi,t ∗ = with Mi,t ∗ measures the
∂INSi,t ρ
minimum conditional variables required for a full absorption of the life insurance effect.

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 Études et Documents n° 16, CERDI, 2016

Table 4: Life insurance and growth, and interaction with financial condition variables
Dependent Variable: GDP per capita growth
VARIABLES (1) (2) (3) (4) (5)
Life insurance premiums 0.00738*** 0.00828*** 0.00396*** 0.00114** 0.000579
(%GDP) (0.00260) (0.00296) (0.00113) (0.000549) (0.000508)
Deposit interest rate (%) -0.000610*
(0.000341)
Life insurance*Deposit interest -0.000709**
rate (0.000296)
Private credit by bank (% GDP) 0.000203** 5.52e-05
(8.89e-05) (7.90e-05)
Life insurance*Private credit -0.000115***
(4.38e-05)
Stock market total value traded 0.000136*** 8.08e-05**
(% GDP) (4.60e-05) (4.03e-05)
Life insurance*Stocktra -4.97e-05***
(1.32e-05)
Log (initial GDP per capita) -0.00620*** -0.00745*** -0.00713*** -0.0067*** -0.00660***
(0.00149) (0.00137) (0.00143) (0.00133) (0.00145)
Log (Population growth) -0.00704*** -0.00739*** -0.00571*** -0.0074*** -0.00718***
(0.00161) (0.00211) (0.00149) (0.00151) (0.00211)
Index of Human capital 0.0115*** 0.0134*** 0.0159*** 0.0126*** 0.0115***
(0.00384) (0.00346) (0.00419) (0.00354) (0.00410)
Domestic Investment (%GDP) 0.00168*** 0.00134*** 0.00170*** 0.00145*** 0.00162***
(0.000217) (0.000220) (0.000170) (0.000221) (0.000168)
Log (1+ Inflation) 0.00348 -0.00572 -0.0158*** -0.00535 -0.0126***
(0.00528) (0.00500) (0.00515) (0.00453) (0.00443)
Log (Government consumption) -0.00352 -0.0118*** -0.0105** -0.0092*** -0.0109***
(0.00415) (0.00371) (0.00416) (0.00344) (0.00405)
Log (Degree of openness) -0.00554* -0.00567** -0.00724** -0.00455* -0.00339
(0.00311) (0.00250) (0.00285) (0.00249) (0.00250)
Log (Terms of trade) -0.0143*** -0.00515 -0.00971* -0.00755 -0.00769
(0.00541) (0.00491) (0.00533) (0.00485) (0.00529)
Constant 0.103*** 0.103*** 0.160*** 0.117*** 0.118***
(0.0311) (0.0285) (0.0364) (0.0296) (0.0328)
Year FE No Yes Yes Yes Yes
Observations 622 658 514 680 506
R² Centered 0.253 0.360 0.450 0.351 0.431
Hansen J, p-value 0.6064 0.2008 0.2171 0.1594 0.3277
First-stage F-statistic 63.822 32.214 35.428 33.560 88.021
(p-value) 0.0000 0.0000 0.0000 0.0000 0.0000
Note: Life insurance variable is instrumented by percentage of the Muslim papulations and life insurance lagged
two period. In addition, banking and stock market variables are instrumented by legal origin. Robust standard
errors are in parentheses. *Significantly different from zero at the 10 percent significance level, ** 5 percent
significance level, *** 1 percent significance level.

4.2.2. A country’s stage development and the life insurance-growth relationship

To answer to the question whether the different stages of economic development influence the
relationship between life insurance and growth. Our sample of 86 developing countries

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 Études et Documents n° 16, CERDI, 2016

include Low and middle income countries (LMY) and Upper middle income countries
(UMC). The results of income group12 effect are presented in table 5.

Table 5: Economic development level on life insurance-growth relationship

Dependent Variable: GDP per capita growth
VARIABLES (1) (2)
Life insurance premiums (%GDP) 0.00109** 0.00581*
(0.000435) (0.00301)
Low & middle income dummy (LMY) -0.0107***
(0.00400)
Life insurance premiums*LMY 0.00324
(0.00303)
Upper middle income dummy (UMC) 0.0118***
(0.00402)
Life insurance premiums*UMC -0.00476
(0.00307)
Log (initial GDP per capita) -0.00949*** -0.00931***
(0.00167) (0.00167)
Log (Population growth) -0.00714*** -0.00698***
(0.00150) (0.00149)
Index of Human capital 0.0116*** 0.0108***
(0.00355) (0.00355)
Domestic Investment (%GDP) 0.00150*** 0.00150***
(0.000218) (0.000217)
Log (1+ Inflation) -0.00807* -0.00874*
(0.00450) (0.00451)
Log (Government consumption) -0.00597* -0.00639*
(0.00337) (0.00338)
Log (Degree of openness) -0.00285 -0.00315
(0.00255) (0.00256)
Log (Terms of trade) -0.00741 -0.00876*
(0.00463) (0.00469)
Constant 0.119*** 0.134***
(0.0292) (0.0313)
Year FE Yes Yes
Observations 702 702
R² Centered 0.356 0.357
Hansen J, p-value 0.1217 0.5548
First-stage F-statistic 41.614 42.748
(p-value) 0.0000 0.0000
Note: Life insurance variable is instrumented by percentage of the Muslim papulations, life insurance lagged two
period and interaction between life insurance and dummy of development level lagged two years. Robust
standard errors are in parentheses. *Significantly different from zero at the 10 percent significance level, ** 5
percent significance level, *** 1 percent significance level.

The results show that the income group does not influence the marginal effect of life
insurance on the economic growth in low and middle income countries (column 1) and upper-
middle income countries (column 2). Thus, our results are in the same direction as those of

12
The analysis is done by interacting a dummy variable, which takes the value of 1 when the country is in the
category of income group, with the insurance variables. The sample is not divided into two groups to perform the
analysis.

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 Études et Documents n° 16, CERDI, 2016

Arena (2008) and Chen et al. (2012) who have found the same results for developing
countries. However, we note a negative effect of the coefficient of dummy for low and middle
income countries on growth (column 1) and a positive effect for upper- middle income
countries (column 2). Thus, the negative effect for low and middle income countries can be
explained by the lack of the necessary structure and framework to promote economic growth
via the financial sector (Avram et al., 2010).

4.2.3. Life insurance development and economic growth: role of regional

specificities.

Table 6 reports the results using regional dummies. We observe that the dummy of Sub-
Saharan Africa (SSA) region has a negative and significant effect and negatively influences
the impact of life insurance on economic growth (column 1). Other regions do not
significantly influence the effect of insurance on growth (column 2 to 6). Thus, the marginal
effect of life insurance on economic growth is less for SSA countries compared to non-SSA
countries. Specifically, a percentage point increase of life insurance premiums to GDP
induces a 0.153 percentage points increase in real GDP per capita growth for SSA countries13.
This compares with a 0.580 percentage points increase for a comparable country in non-SSA
(either 0.427 percentage points lower for SSA countries). The negative and significant effect
of the Sub-Saharan Africa region dummy can be explained by the socio-political situation in
the region characterized by the political instabilities that do not favor the growth and play
unfavorable on the development of life insurance sector.

13
(0.0058- 0.00427*Sub-Saharan Africa)*100

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 Études et Documents n° 16, CERDI, 2016

Table 6: Regional effect and life insurance-growth relationship

Dependent Variable: GDP per capita growth
VARIABLES (1) (2) (3) (4) (5) (6)
Life insurance premiums 0.0058*** 0.00171*** 0.00137*** 0.00149*** 0.00135*** 0.00144***
(%GDP) (0.00191) (0.000463) (0.000474) (0.000458) (0.000440) (0.000457)
Sub-Saharan Africa (SSA) -0.00513*
(0.00294)
Life insurance premiums -0.00427**
(%GDP)*SSA (0.00194)
Europe & Central Asia (ECA) 0.0115
(0.00830)
Life insurance premiums 0.100
(%GDP)*ECA (0.0709)
Latin America & Caribbean -0.00402
(LAC) (0.00360)
Life insurance premiums 0.00403
(%GDP)*LAC (0.00585)
Middle East & North Africa 0.00156
(MNA) (0.00392)
Life insurance premiums 0.00143
(%GDP)*MNA (0.0101)
South Asia (SAS) 0.00359
(0.00373)
Life insurance premiums 0.00307
(%GDP)*SAS (0.00357)
East Asia & Pacific (EAP) 0.00411
(0.00552)
Life insurance premiums -0.00107
(%GDP)*EAP (0.00291)
Log (initial GDP per capita) -0.0070*** -0.0066*** -0.00624*** -0.0062*** -0.0059*** -0.0061***
(0.00135) (0.00133) (0.00145) (0.00130) (0.00138) (0.00137)
Log (Population growth) -0.0062*** -0.0073*** -0.00719*** -0.0073*** -0.0073*** -0.0073***
(0.00145) (0.00148) (0.00147) (0.00148) (0.00149) (0.00149)
Index of Human capital 0.0113*** 0.0131*** 0.0145*** 0.0136*** 0.0130*** 0.0131***
(0.00355) (0.00357) (0.00334) (0.00354) (0.00364) (0.00350)
Domestic Investment (%GDP) 0.00141*** 0.00155*** 0.00151*** 0.00153*** 0.00151*** 0.00153***
(0.000185) (0.000182) (0.000187) (0.000188) (0.000192) (0.000196)
Log (1+ inflation) -0.00533 -0.00835** -0.00662 -0.00749* -0.00758* -0.00803*
(0.00453) (0.00421) (0.00452) (0.00447) (0.00429) (0.00441)
Log (Government -0.00483 -0.00697** -0.00660* -0.00577 -0.00503 -0.00484
consumption) (0.00343) (0.00337) (0.00350) (0.00371) (0.00357) (0.00346)
Log (Degree of openness) -0.00359 -0.00270 -0.00399 -0.00387* -0.00247 -0.00441*
(0.00239) (0.00233) (0.00250) (0.00235) (0.00245) (0.00242)
Log (Terms of trade) -0.00786* -0.00913* -0.00971** -0.00972** -0.00939** -0.0100**
(0.00475) (0.00467) (0.00468) (0.00476) (0.00468) (0.00469)
Constant 0.0956*** 0.104*** 0.100*** 0.101*** 0.0912*** 0.103***
(0.0284) (0.0272) (0.0277) (0.0278) (0.0283) (0.0278)
Year FE Yes Yes Yes Yes Yes Yes
Observations 702 702 702 702 702 702
R² Centered 0.359 0.362 0.348 0.348 0.350 0.348
Hansen J, p-value 0.2081 0.3264 0.4929 0.3486 0.1945 0.3028
First-stage F-statistic 64.215 31.055 85.393 67.520 38.740 94.180
(p-value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Note: Life insurance variable is instrumented by percentage of the Muslim papulations, life insurance lagged two
period and interaction between life insurance and dummy of region lagged two years. Robust standard errors are
in parentheses. *Significantly different from zero at the 10 percent significance level, ** 5 percent significance
level, *** 1 percent significance level

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 Études et Documents n° 16, CERDI, 2016

4.2.4. Life insurance and economic growth: role of the institutions quality and
legal environment

In this section we discuss the hypothesis on which the responsiveness of economic growth to
life insurance development depends, in a linear fashion, upon institutional quality and legal
origin. The regression results from the estimation of Equation (2) are reported in Table 7.
Each institutional variable is included along with its interaction with life insurance
penetration. Diagnostic tests of Fisher and Hansen are favorable to the validity of our
instruments. Our results support the prediction that the responsiveness of economic growth to
life insurance development depends on the level of institutional quality and legal
environment.

The interaction terms of life insurance and the quality of bureaucracy (BQ), control of
corruption (COR) and the composite index of the institutions quality (IQ) are positive and
significant with coefficients equal to 0.0204, 0.0284 and 0.0206, respectively (column 1, 2
and 4). Thus, the improvement of the institutions quality contributes to improve the marginal
positive effect of life insurance premiums on economic growth. Indeed, the positive signs of
interactive terms suggest that the positive effect of the development of life insurance on
economic growth is more pronounced for countries with high-quality institutions. These
results imply an important economically effect of institutions on the responsiveness of
economic growth to life insurance development. In terms of impact, ceteris paribus, when the
index of the institutions quality increases from 0.25 to 0.75 percentage points (column 4), the
marginal impact of life insurance growth increases by 0.0179 to 0.0282. As for quality of the
bureaucracy and control of corruption, the responsiveness of economic growth to the life
insurance development increases from 0.0102 and 0.0142, respectively (column 1 and 2).

Regarding the role of the legal environment, we note that British legal system dummy
positively and significantly influences the economic growth while the interaction term with
life insurance is negative (column 5). In other words, life insurance development positively
influence the economic growth, but its marginal impact is less for British colonial countries.
In contrary, French legal system has a negative effect on growth but does not influences the
marginal effect of life insurance (column 6). This result can be explained by the fact that life
insurance is most developed in English legal system countries while in French legal system,
there is an obligatory social security system for public and private sector workers.

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Table 7: Life insurance and institutions quality and legal environment

VARIABLES (1) (2) (3) (4) (5) (6)

Life insurance premiums 0.0113** 0.0131* 0.00434* 0.0128** 0.00630*** 0.00094*
(%GDP) (0.00469) (0.00737) (0.00234) (0.00586) (0.00231) (0.00056)
Bureaucracy quality (BQ) 0.00356
(0.0102)
Life insurance premiums*BQ 0.0204**
(0.00938)
Control of Corruption (COR) 0.0299**
(0.0123)
Life insurance premiums*COR 0.0284**
(0.0143)
Law and order (LO) 0.0168***
(0.00609)
Life insurance premiums*LO -0.00401
(0.00321)
Index of the institutions quality 0.0330**
(IQ) (0.0145)
Life insurance premiums 0.0206**
(%GDP)*IQ (0.0102)
British Colony 0.00635**
(0.00263)
Life insurance -0.00555**
premiums*British (0.00233)
French Colony -0.0070***
(0.00286)
Life insurance 0.00245
premiums*French (0.00237)
Log (initial GDP per capita) -0.00689*** -0.0069*** -0.0071*** -0.0069*** -0.00609*** -0.0056***
(0.00132) (0.00133) (0.00125) (0.00125) (0.00135) (0.00148)
Log (Population growth) -0.00731*** -0.0066*** -0.0072*** -0.0069*** -0.00841*** -0.0095***
(0.00168) (0.00168) (0.00174) (0.00168) (0.00178) (0.00198)
Index of Human capital 0.0140*** 0.0150*** 0.0152*** 0.0127*** 0.0126*** 0.0117***
(0.00376) (0.00337) (0.00345) (0.00331) (0.00370) (0.00394)
Domestic Investment (%GDP) 0.00141*** 0.00140*** 0.00127*** 0.00122*** 0.00149*** 0.00154***
(0.00017) (0.000178) (0.00019) (0.000191) (0.000184) (0.000196)
Log (1+ Inflation) -0.00713* -0.00721* -0.00438 -0.00426 -0.00830* -0.006419
(0.00427) (0.00417) (0.00387) (0.00409) (0.00445) (0.004604)
Log (Government -0.00598* -0.00558 -0.00766** -0.0096*** -0.00398 -0.006555
consumption) (0.00354) (0.00355) (0.00345) (0.00343) (0.00366) (0.00402)
Log (Degree of openness) -0.00521** -0.00522** -0.00551** -0.00512** -0.00373 0.0000301
(0.00255) (0.00244) (0.00249) (0.00239) (0.00235) (0.00255)
Log (Terms of trade) -0.00868* -0.00866* -0.00740 -0.00707 -0.00844* -0.00648
(0.00486) (0.00483) (0.00454) (0.00453) (0.00474) (0.0049)
Constant 0.0997*** 0.118*** 0.112*** 0.121*** 0.0900*** 0.08209***
(0.0286) (0.0294) (0.0279) (0.0296) (0.0283) (0.02877)
Year FE Yes Yes Yes Yes Yes No
Observations 672 670 672 672 687 687
R² Centered 0.353 0.351 0.354 0.356 0.358 0.359
Hansen J, p-value 0.2750 0.4590 0.2327 0.4603 0.2823 0.2628
First-stage F-statistic 53.241 55.142 104.184 27.566 63.391 34.056
(p-value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Note: Life insurance variable is instrumented by percentage of the Muslim papulations, life insurance lagged two
period and interaction between life insurance and indicators of institution quality lagged two years. Robust
standard errors are in parentheses. *Significantly different from zero at the 10 percent significance level, ** 5
percent significance level, *** 1 percent significance level.

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 Études et Documents n° 16, CERDI, 2016

5. Conclusion

This paper has examined the effect of life insurance activity on economic growth and
heterogeneity of insurance effect. Using a sample of 86 developing countries over the period
1996-2011 and controlling for endogeneity of life insurance premiums, the econometric
results suggest that countries with better-developed life insurance activity have to higher level
of economic growth. This result is robust to the addition of other determinants of growth and
other specifications with alternative measure of the development of life insurance. However,
the results highlight some important heterogeneities on life insurance effect among countries.
Thus, the marginal positive impact of life insurance on economic growth decreases with the
levels of deposit interest rate, bank credit to private sector and stock market traded. In
addition, the marginal positive impact of insurance on economic growth is lower in the
countries of the Sub-Saharan African region and in British legal system countries. Finally, the
development of life insurance has a greater effect on economic growth in presence of high
quality institutions.

This work provides an empirical justification to reinforce the promotion of life insurance
market in developing countries. Thus, it will be judicious to continue the reforms aimed at
developing the financial sector in particular life insurance sector, which may be a captive
source of long term financing alternative of the economy to boost economic growth. This is
particularly the case in countries with high-quality institutions.

In this study, we have analyzed the effect of insurance on growth. This does not allow us to
analyze life insurance development on the development of banking sector and stock market.
However, a growing body of research emphasizes the importance of insurance sector in the
development of stock and bond markets (Dickinson, 2000; Catalan et al, 2000 and Impavido
et al., 2003.).

Future work could deepen those things by analyzing the effects of the development of
insurance on the development of banking and stock market sector; which will identify the
effects of the transmission channels of insurance development on economic growth. Future
work needs to deepen these findings by analyzing the insurance effect on banking and stock
market; that will allow to identify the channels of transmission of the insurance effect on
economic growth.

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 Études et Documents n° 16, CERDI, 2016

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Appendices

Table A -1: Review of previous studies on the relationship between insurance and growth

Authors Year Sample of Study period Dependent variables Explanatory variables Methodology used
countries
Ward & Zurbruegg 2000 9 OECD 1961-1996 Total real premiums, real Real GDP, total premiums Bi-variate VAR
countries GDP Granger causality
Webb, Grace and 2002 55 countries 1980-1996 GDP& GDI per capita Bank credit, property liability 3SLS
Skipper premiums/GDP, life premiums/GDP
Kugler and Ofoghi 2005 United 1966-2003 Real GDP per capita General insurance premium, long-term VAR, Granger
Kingdom insurance premiums ( life +pension) causality,
cointegration
Arena 2008 55 countries 1976-2004 Real GDP per capita Private credit/GDP, stock market turnover, GMM system
growth life premiums/GDP, non-life premiums/GDP estimator (dynamic
panel)
Haiss and Sümegi 2008 29 European 1992-2004 Real GDP per capita Physical capital stock, human capital stock, Panel least square
countries life and non-life premiums, yearly insurance
total investment
Avram, Nguyen and 2010 93 countries 1980-2006 Real GDP per capita Life , non-life and insurance premiums/GDP OLS and GMM
Skully growth and per capita system
Han, Li, Moshirian 2010 77 countries 1994-2005 Real GDP per capita Life , non-life and insurance premiums/GDP GMM (dynamic
and Tian and per capita panel)
Han, Cheng and Yu 2012 12 European 1980-2009 Real GDP Life and non-life premiums/GD¨P, Private Cross-section and
countries credit/GDP, liquid liabilities of the financial fixed effect Panel
intermediary to GDP.
Chen, Lee and Lee 2012 60 countries 1976-2005 Real GDP per capita Life , non-life and insurance premiums/GDP GMM-system
and per capita (dynamic Panel)
Lee, Lee, and Chiu 2013 41 countries 1979-2007 Real GDP per capita Life , non-life and insurance premiums/GDP Cointegration and
and per capita causality in panel
Adapted with modification form Avram and al (2010).

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Table A-2: Definition and source of variables

Variables Definition and construction Source
Real GDP per capita Ratio of GDP to population. GDP is in constant 2005 US$ World Bank (WDI)
Real GDP per capita growth Log difference or real GDP per capita Author’s calculation using WDI
Initial GDP per capita Real GDP per capita in beginning of period Author’s calculation using WDI
Life insurance penetration Life premiums to GDP Čihák et al. (2012)
life insurance density (Life premiums to GDP x Ratio of GDP to population)/100 Author’s calculation using WDI
and Čihák et al. (2012)
Population growth Population growth (annual %) is the exponential rate of growth of midyear population from year t-1 to t, expressed as a
percentage.
Inflation rate Annual change in CPI (%) WDI
Government consumption ratio of government consumption to GDP
Degree of openness (Imports + Exports) / GDP
Changes in terms of trade Terms of trade of goods and services World Bank's Database of Political
Institutions
Domestic investment rate Gross fixed capital formation (% of GDP) WDI
Human capital Index of human capital per person, based on years of schooling (Barro /Lee, 2012) and returns to education Penn World Table, Version 8.0
(Psacharopoulos, 1994)
Deposit interest rate Deposit interest rate (%) WDI, 2014
Private credit by bank Private credit by deposit money banks to GDP
Stock market total value Total shares traded on the stock exchange to GDP Čihák et al. (2012)
traded (% GDP)
Low & middle income Low & middle income =1 others =0
Upper middle income Upper middle income=1 others =0
Sub-Saharan Africa Sub-Saharan Africa =1 others=0
Europe & Central Asia Europe & Central Asia=1 others =0
Latin America & Caribbean Latin America & Caribbean=1 others =0
Middle East & North Africa Middle East & North Africa=1 others =0 World Bank Atlas
South Asia South Asia=1 others=0
East Asia & Pacific East Asia & Pacific=1 others =0
French Dummy variable that is equal to 1 if the country uses French's legal system and zero otherwise
British Dummy variable that is equal to 1 if the country uses British's legal system and zero otherwise
Control of corruption Index assessing the control of corruption within the political system. It ranges from 0 to 6, with a higher value of the index
reflecting a better control of corruption
Law and Order Index assessing the strength and the impartiality of the legal system, as well as the popular observance of the law. The Authors’ calculations based on
index ranges from 0 to 6, with a higher value of the index reflecting a higher institutional quality. International Country Risk Guide
Bureaucracy Quality Index of the institutional strength and quality of the bureaucracy, ranging from 0 to 4. The higher the index, the stronger (ICRG, 2012) data
the quality of the bureaucracy
index of Institutional Synthetic index of Institutional Quality: arithmetic mean of ICRG indices of Bureaucracy Quality, Law and Order, and
Quality Control of Corruption. The higher the index, the higher the institutional quality.

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Table A-3: Descriptive statistics

Variable Obs Mean Std. Dev. Min Max

GDP per capita growth 1273 0.024967 0.0417028 -0.1658664 0.285408
Life insurance premiums (%GDP) 1286 0.7699246 1.640257 0.001 15.784
Log (1+life insurance per capita) 1273 2.190132 1.772696 0.0158299 8.577292
Log( Initial GDP per capita) 1278 7.63264 1.315799 4.863859 12.55699
Log ( Population growth) 1237 0.5206107 0.7726027 -6.117022 2.854452
Index of Human capital 1087 2.292636 0.4877972 1.135571 3.268062
Domestic Investment (%GDP) 1357 23.36869 7.273782 4.142 57.991
Log (1+Inflation) 1299 2.848138 0.5252723 -1.597744 8.332093
Log (Government consumption) 1254 3.222975 0.3677855 -0.594207 4.063129
Log (Degree of openness) 1334 4.272271 0.4702486 2.703563 5.395478
Log (Terms of trade) 1315 4.623377 0.3292781 3.304411 6.248037
Deposit interest rate (%) 1240 9.334478 9.885214 0.8541667 147.125
Private credit by bank 1282 30.29233 25.40346 1.049314 165.8018
Stock market total value traded (% GDP) 822 14.5298 30.64491 0.0022657 349.2441
Bureaucracy quality 1301 0.54702 0.1882262 0 1
Control of Corruption 1301 0.53175 0.1624121 0 1
Law and order 1301 0.52664 0.2150418 0 1
Index of the institutions quality 1301 0.53514 0.1288538 0 1
British Colony : 1343 0.32166 0.4672903 0 1
French Colony 1343 0.53536 0.4989333 0 1

Table A- 4: Countries grouped by region

Sub-Saharan Europe & Latin America & Middle East & North South Asia East Asia & Pacific
Africa (SSA) Central Caribbean (LAC) Africa (MNA) (SAS) (EAP)
Asia
(ECA)
Angola Albania Argentina Algeria Bangladesh China
Botswana Azerbaijan Bolivia Egypt India Indonesia
Burkina Faso Belarus Brazil Islamic Republic of Iran Nepal Malaysia
Cameroon Bulgaria Colombia Jordan Pakistan Papua New Guinea
Côte d'Ivoire Hungary Costa Rica Lebanon Sri Lanka Philippines
Ethiopia Kazakhstan Dominican Republic Libya Thailand
Gabon Moldova Ecuador Morocco Vietnam
Ghana Serbia El Salvador Tunisia
Kenya Turkey Guatemala Yemen
Madagascar Ukraine Guyana
Malawi Honduras
Mali Jamaica
Mauritius Mexico
Mozambique Nicaragua
Namibia Panama
Niger Paraguay
Nigeria Peru
Republic of Suriname
Congo
Senegal Venezuela
South Africa
Sudan
Tanzania
Togo
Uganda
Zambia

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