Insurance Market Development

THE ROLE OF INSURANCE IN
ECONOMIC GROWTH
AND ACTIVITY
Whereas several studies establish that finan-
cial development is an important determi-
nant of national economic growth,
3
 under-
standing the causal relationship between in-
surance market growth and economic devel-
opment is still lacking. According to Patrick 
(1966), economic expansion can be led by 
supply-led through growth in financial de-
velopment or, alternatively, financial devel-
opment can be demand-led through growth 
in the economy. In other words, causality is 
two-way. The work of Outreville (1990, 
1992, and 1996) is notable for identifying 
links between an economy’s financial and 
insurance market development. The 1992 
study shows a positive relationship between 
economic expansion and insurance sector 
growth. Insurance markets (measured by the 
ratio of insurance premiums to GDP) also 
are shown to depend significantly on a coun-
try’s financial development. In examining 
market structure, Outreville finds that devel-
oping countries have a supply causality pat-
tern to their development, suggesting that 
supply-side factors should receive more re-
search and policy attention.
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King and Levine (1993) argue, “Schumpeter might 
be right.” Levine and Zervos (1996) show that stock 
market development is positively associated with 
economic growth. Demirgüç-Kunt and Levine (1996) 
also clarify that the level of stock market develop-
ment is a good predictor of economic growth. Boyd 
and Smith (1996) demonstrate that the endogenous 
evolution of debt and equity markets in the develop-
ment process provides an economy with a more effi-
cient set of financial opportunities and encourages the 
development of capital markets. Levine (1997) and 
Beck and Levine (2001) find a positive causal impact 
of financial development on productivity and eco-
nomic growth. Rajan and Zingales (1998) confirm 
that economic growth finds a limitation in the finan-
cial system. Caprio and Demirgüç-Kunt (1998) con-
firm that long-term credit is scarce in emerging-
market countries, especially for small firms that 
would obtain long-term finance if located in indus-
trial countries. Rajan and Zingales (2001a, 2001b)