Insurance and economic growth

The causal link between insurance services and economic growth, when existing, can move in both directions; from the growth of the economy to that of insurance services, and vice versa. The link between economic growth – as synthetically represented by GDP performance – and increasing demand for insurance services can be proven both logically and empirically in a number of countries. In logical terms, it would be sufficient to examine Italy’s sectoral interdependence matrix (ISTAT 2010): insurance is driven, to a differing measure and intensity, by the output of 65 intermediate branches of the Italian economy. In other words, any positive change whatsoever in GDP systematically generates a growth in insurance business. That same relationship, i.e. GDP growth – increase of insurance services, has been extensively examined also at an econometric level (cfr. Ciocca). Income elasticity of the demand for risk protection is systematically and significantly higher than the unit, i.e. when there is a change in income, the demand for protection against risk grows in more than just a proportional way.

The casual link between a change in the insurance sector and a change in GDP, where the variation of the insurance sector is the independent variable, has also been amply demonstrated. An econometric research (Liyan Hari et al.) examining 27 countries over the 1994-2005 period, showed that growth in the insurance sector could positively influence economic growth. In other terms, the insurance sector provided a fairly strong contribution to the economic development of the country where such growth occurred. This correlation was stronger in the more developed countries, where average income was higher. At the same time another study, this time involving 29 countries, including Italy, confirmed the role of the insurance sector (in particular, life insurance) in sustaining economic growth in the countries considered (Haiss and Sumegi), although the link was weaker than the one emerging in the study mentioned earlier and was considered “weak”. And finally, a study taking into examination an aggregate of 56 countries showed a strong link between insurance activity and economic growth, even going as far as considering the insurance market an economic driver (Arena).

There are also other variables that can impact the insurance activity – GDP relationship: interest rates, welfare, population trends, size of the financial market and, of course, the cost and quality of the insurance services offered. But the effect of these and other variables appeared to be less systematic and weaker than the effect of growth/decrease of income, which continues to be the key determinant of the demand for and offer of insurance services in all their multifaceted technical variations (Brainard).

These analyses define the insurance sector as a “luxury good” on the Engel curve (relationship between the quantity of a good that is demanded and income): as GDP grows, the demand for insurance services increases rapidly. On the contrary, if the insurance offer declines, and/or is of low quality and provided at high cost, there would be a noticeable reduction of wealth in the community, as would be indicatively shown by per capita income levels.

As for the role of the financial market (including financial intermediation activity carried out by insurance companies) in GDP growth, econometric analysis showed that “the quantitative and qualitative progress of finance can go as far as lifting per capita GDP by 1 p.p.” (Ciocca).