Insurance activity and economic performance: Fresh evidence from asymmetric panel causality tests

• Published date: 01 August 2019
• Author: Abdulnasser Hatemi‐J,Chi‐Chuan Lee,Chien‐Chiang Lee,Rangan Gupta
• DOI: http://doi.org/10.1111/infi.12333
• Date: 01 August 2019

DOI: 10.1111/infi.12333

ORIGINAL ARTICLE

Insurance activity and economic performance:

Fresh evidence from asymmetric panel causality

tests

Abdulnasser Hatemi-J

1

|

Chi-Chuan Lee

2

|

Chien-Chiang Lee

3

|

Rangan Gupta

4

1

Department of Economics and Finance,

UAE University, Al Ain, United Arab

Emirates

2

School of Management, Beijing Normal

University Zhuhai, Zhuhai, China

3

Department of Finance, National Sun

Yat-sen University, Kaohsiung, Taiwan

4

Department of Economics, University of

Pretoria, Pretoria, South Africa

Correspondence

Chien-Chiang Lee, Department of

Finance, National Sun Yat-sen

University, Kaohsiung, Taiwan.

Email: cclee@cm.nsysu.edu.tw

Funding information

Ministry of Science and Technology,

Grant number: MOST 107-2410-H-110-

005-MY2

Abstract

Insurance plays a fundamental role in any modern economy,

but the literature has not accounted for the potential

asymmetric causal impacts from the dynamic interaction

between the insurance market and economic performance.

This paper aims to fill this gap by studying the causal

relationship between several measures of insurance per

capita and real GDP per capita in the G7 countries over the

period 1980–2014 via asymmetric panel causality tests. Our

results show that insurance market activity and economic

performance exhibit bidirectional causalities, but their

direction, intensity and significance are different due to

distinct market situations. In general, insurance activity

plays a passive role in economic performance, while

economic performance has a significant role in insurance

activity. These findings offer several useful insights for

policy makers and researchers.

1

|

INTRODUCTION

Insurance is an integral part of any modern economy, as it not only facilitates a myriad of

economic transactions through risk transfer and indemnification, but also plays a vital financial

intermediary role (Kugler & Ofoghi, 2005).

1

A considerable amount of literature has been

devoted to understanding the interrelationship between insurance market activities and

economic performance, and along with many different econometric models there is a variety of

conflicting results. A number of issues still remain unsolved. First, although the literature has

International Finance. 2018;1–20. wileyonlinelibrary.com/journal/infi © 2018 John Wiley & Sons Ltd

|

1

221

International Finance. 2019;22:221–240. wileyonlinelibrary.com/journal/infi © 2018 John Wiley & Sons Ltd

documented a generally positive relationship between insurance activity and economic

performance (see Outreville, 2013, for a comprehensive survey), recent evidence shows that

finance has no effect on growth, which is known as the ‘vanishing effect’of financial depth

(Arcand, Berkes, & Panizza, 2015; Rousseau & Wachtel, 2011), or even has an adverse effect,

thus supporting the novel view of the ‘toomuchfinance’hypothesis (Law & Singh, 2014; Lee,

Lee, & Chiou, 2017; Samargandi, Fidrmuc, & Ghosh, 2015). The linkage between insurance

activities and economic activities lacks any concrete consensus and is worth deeper

investigation.

Second, from a theoretical point of view, the ‘supply-leading’and ‘demand-following’views

as presented by Patrick (1966) postulate that either the growth in financial systems speeds up

economic growth, or alternatively, that economic activity pushes forward financial development.

For the empirical aspect, much attention has been paid to the impact of insurance market activity

on economic performance (Beenstock, Dickinson, & Khajuria, 1988; Haiss & Sümegi, 2008) or

the effect of economic performance on insurance market activity (Beck & Webb, 2003; Browne &

Kim, 1993; Gupta, Lahiani, Lee, & Lee, 2018; Outreville, 1990). Knowledge is limited with

regard to understanding the causal relationships between insurance market development and

economic performance. Even though a few studies have addressed the causal nexus between

insurance activities and economic performance (e.g. Chang, Lee, & Chang, 2014; Lee, Lee, &

Chiu, 2013; Ward & Zurbruegg, 2000), the causality technique used therein only suggests which

variables have statistically significant impacts on the other variable in the system regardless of

whether unexpected changes in the given variable have an effect on the other variables. In

addition, the standard causality method implicitly assumes that the impact of a positive shock is

the same as the impact of a negative shock in absolute terms. This assumption appears to be too

strong, as economic individuals react differently to a positive shock compared to a negative shock

(Hatemi-J, 2012).

Third, it is widely acknowledged that asymmetric impacts prevail in many markets. In financial

markets, people react more to negative news than to positive news (Hatemi-J, Ajmi, EI Montasser,

Inglesi-Lotz, & Gupta, 2016). A positive unexpected shock can increase market volatility and stock

prices, whereas the effect is magnified when it is negative. This non-linear behavior results from the

presence of market frictions and transaction costs, or the asymmetric information phenomenon, as well

as the interaction between heterogeneous traders (McMillan, 2003; Stiglitz, 1974). Serious

consequences of functional misspecification have been among the most frequent concerns and

criticisms in the systematic setting, with some recent studies on the finance–growth nexus even

positing that the relationship between finance and growth is non-monotonic (e.g. Arcand et al., 2015;

Haiss, Juvan, & Mahlberg, 2016; Rousseau & Wachtel, 2011). Whether there exists an asymmetric

causal relationship between insurance activities and economic performance still awaits a more in-depth

exploration.

This paper therefore simult aneously bridges these gaps in th e literature by investigati ng the

asymmetric causal nexus of real inc ome and life insurance, non-life insurance, and total insuran ce in

the G7 countries over the perio d 1980–2014. We implement this by cons tructing the cumulative

sums of positive and negative shocks in orde r to account for potential asymmetric cau sal effects

within the panel of these countr ies. The G7 countries encompass the most developed econ omies and

financial markets in the world. Give n that they account for nearly 61.65% of th e premium value of

the world in 2014, their respective outc omes can be concisely compared and co ntrasted. We

contribute to existing empiric al analyses by utilizing the asymmet ric causality panel tests propos ed

by Hatemi-J (2011) that explicitly ac count for the possibility that agents in f inancial markets react

more to negative shocks than to positiv e ones. This approach also allows us to acc ommodate for

2

|

HATEMI-J ET AL.

2

|

HATEMI-J ET AL.

222