approximately 45% of the offers made in the Doha round of trade negotiations related to insurance: this is a sector not as bound by sovereignty issues as the banking sector.

Insurers also tend to be less sensitive to economic crises and can more easily ride through them than deposit takers (Leidke, 2007). Leidke has also pointed to the use of the insurance mechanism by governments to effect merit goods through insurance products with positive externalities (e.g. motor third party) and Curak et al (2009) to the transfer of risks to the insurance sector that would otherwise limit fiscal space (e.g. health and longevity insurance).

# **Empirical evidence**

One contemporary study to which Merton and Bodie (2005) referred was carried out by Levine, Beck and Loayza (2000). This looks at the impact of financial sector development on economic growth rates, and introduces GMM methodologies that are able to deal with endogeneity issues (i.e. broadly feedback loops from the dependent variable to the explanatory variables), including omitted variables, through their application to panel data (i.e. data that are both cross country and longitudinal). These are supplemented by more traditional cross country techniques.<sup>10</sup> Proxies for financial sector development in this paper assume financial intermediation is the key growth driver. Subsequent empirical papers in the mainstream literature, while acknowledging the relative balance sheet parity of insurers and pension funds with banks in advanced markets, have continued to focus on credit and/or money supply (M2 or M3) as the main metrics for measuring financial sector development.

However some recent papers have acknowledged the role of risk transfer and spreading mechanisms. A World Bank overview paper by Demirguc-Kunt and Levine (2008) defines the 5 functions of the financial sector as follows:

- 1.Produce information ex ante about possible investment and allocated capital

- 2.Monitor investments and exert corporate governance after providing finance

- 3.Facilitate the trading, diversification and management of risk

- 4.Mobilize and pool savings

- 5.Ease the exchange of goods and services.

However, the paper does not specifically refer to the role of the insurance sector.<sup>11</sup> In a recent paper Cihak et al. (2013) describe the World Bank’s new Global Financial Development Database, which proposes the inclusion of a number of insurance sector metrics. Given evidence that the banking function can be neutral or even negative in certain contexts<sup>12</sup> in fostering productivity (De Gregorio and Guidotti, 1995; Leahy et al, 2001; Fitzgerald, 2006), and that the insurance sector may be superior in this regard (Adams et al, 2009; Lee, 2013) an investment in the development of a World Bank insurance data panel would generate a significant public good.

> 10 Demetriades and Hussein (1996) point to the dangers inherent in the assumption of institutional homogeneity in cross country studies.

> 11 This unwillingness to include insurance metrics in the mainstream empirical work partly reflects a lack of suitable data, but may also be due to a historical path dependency whereby a separate insurance academic steam developed.  To quote Athearn, 1962, most economists treat insurance ‘as they would an unwanted step-child’. Agricultural economics is one of the few sub streams that has bridged the two disciplines, reflecting the unavoidable existence of risk and uncertainty in that space.

> 12 Typically for fragile economies or where rapid liberalization occurs in the absence of necessary institutional controls.

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