# **1. Introduction**

The last two decades have seen accelerated growth of insurance markets. Total world written real premiums increased by 82 percent between 1997 and 2004 (104 percent in the life insurance business and 60 percent in the non-life insurance one), from US$ 1.6 trillion to US$ 2.9 trillion.<sup>1</sup> Emerging Markets (EMs) have recently experienced significantly faster real growth of their insurance sectors than industrialized countries (52 percent versus 27 percent between 1997 and 2004), reflecting liberalization and financial integration after the implementation of structural reforms.<sup>2</sup> Insurance market activity, both as financial intermediary and as provider of risk transfer and indemnification, may promote economic growth by allowing different risks to be managed more efficiently encouraging the accumulation of new capital, and by mobilizing domestic savings into productive investments. In this context, the evidence mentioned above raises questions regarding the impact that the faster growth of insurance activity would have on economic growth.

So far, most of the empirical work has assessed the impact of the banking sector and stock market development on economic growth (Levine, 2004). However, even though the potential contribution of the insurance market activity on economic growth has been recognized, the assessment of a potential causal relationship between insurance market activity and economic growth has not been as extensively studied as that of banks. This reflects both data availability and the rather arcane reputation of the sector in economic circles.

In this context, the purpose of the present paper is to provide a systematic assessment of the causal effect of insurance market activity on economic growth, taking into account the different effects that life and non-life insurance could have due to the different benefits that they provide to households and corporations. To accomplish this task we use measures of insurance premiums as proxies of insurance activity for a set of 56 countries over the 1976-2004 period and use an estimation method that is suited to panel data, and accounts for some endogeneity in the explanatory variables. This is the generalized method of moments (GMM) for dynamic models of panel data developed by Arellano and Bond (1991) and Arellano and Bover (1995).

Among our main results we found robust evidence of a causal relationship of insurance market activity on economic growth. Both life and non-life insurance premiums have a positive and significant effect on economic growth. We also found evidence that in the case of life insurance, the impact on economic growth is driven by high-income countries only. On the other hand, in the case of non-life insurance, its impact is driven by both high-income and developing (middle and low-income) countries. However, the results

> 1Author’s calculations based on premium data collected and published by Swiss Re.

> 2 Even though the faster growth in insurance market activity has taken place in EMs, the absolute real written premium numbers are larger for industrialized countries (US$ 2.6 trillion versus US$ 0.3 trillion for the year 2004 only).

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