Natural disaster and economic growth in Africa: the role of insurance

Abstract

This study examines natural disasters’ short-run and long-run effects on economic growth. We analysed insurance’s short-run and long-run role in the natural disaster-economic growth nexus using 48 African countries from 2000 to 2020. Using a two-step system GMM, the study revealed that natural disasters have a short-term detrimental effect and a favourable long-term impact on economic growth. Regarding the role of insurance in the relationship between natural disasters and economic growth, it should be noted that while insurance and those affected have a positive complementary effect on economic growth in the short run, the long-term effects of insurance and natural disasters on economic growth are negligible. Therefore, regulators must enforce periodic high regulatory capital requirements to ensure the financial stability of insurance markets, especially the non-life market in Africa, and to enable insurers to absorb the unforeseen shocks from natural disasters in Africa. Also, regulators should create insurance coverage awareness through insurance education to promote insurance development and help reduce individuals’ and businesses’ financial losses upon the occurrence of natural disasters.

Impact statement

During the previous decade, over three thousand annual natural disasters have displaced millions, cost billions, and caused death, injury, and financial loss. These strain economies considerably. As high-income economies suffer from natural disasters, low-income nations are more susceptible and over-rely on help and grants. Aid and subsidies have failed to reconstruct economies following natural catastrophes; therefore, loans and insurance are used. The findings reveal that natural disasters hurt economic growth in the short term but help in the long term. Insurance and those affected have a positive complementary effect on economic growth in the short run, but the long-term effects are negligible. Thus, regulators and governments should safeguard the financial viability of insurance markets, notably the African non-life market, to allow insurers to withstand natural catastrophe shocks, especially in the immediate term. For insurance development and to limit financial losses from natural catastrophes, regulators and governments should educate the public about insurance coverage.

Keywords:

• Natural disasters
• insurance development
• system generalised methods of moment (GMM)
• economic growth
• Africa

JEL CLASSIFICATION:

• G22
• O44
• Q54

REVIEW EDITOR:

• Aye Goodness
• Senior Lecturer
• Agricultural Economics
• University of Agriculture
• Makurdi Benue State
• Benue
• Makurdi
• Nigeria

SUBJECTS:

• Development economics
• 50 Social sciences
• 50.5 Development studies
• 50.5.8 Economics and development
• 50.5.9 Environment & the developing world
• 50.6 Economics, finance, business & industry
• 50.6.3 Finance

Disclosure statement

The Authors report no potential conflict of interest.

Data availability statement

Data for this study would be provided upon request.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Hilda Gyamfi Ackomah

Hilda Gyamfi Ackomah I am currently a PhD student in finance and risk management at the University of Ghana Business School. I have an MPhil in Risk Management and Insurance and a BSc (Administration) in Insurance.

Lord Mensah

Lord Mensah I have a PhD in Financial Economics from the University of Antwerp, an MSc in Financial Mathematics from the University of Kaiserslautern, Germany and a BSc in Mathematics from the Kwame Nkrumah University of Science and Technology. I have published extensively in highly reputable journals. I have consulted extensively for the World Bank, the United Nations Development Programme, and the Ghana Government. I am currently an associate professor in Finance at the University of Ghana Business School.

Saint Kuttu

Saint Kuttu I have a PhD in finance and an MSc in Computational Finance from the Hanken School of Economics, Finland, and a BSc (Administration) in Banking and Finance from the University of Ghana. My research interests lie in modelling financial time series, inclusive growth in Africa, and financial and insurance risk in general. I have published extensively in reputable journals hosted by Elsevier, Taylor & Francis, Sage, Wiley, and Springer. I have also consulted for the World Bank, the State Secretariat for Economic Affairs (SECO) in Switzerland, and the Ghana Government. I am currently a senior lecturer in Finance and risk management at the University of Ghana Business School.