Does insurance demand or financial development promote economic growth? Evidence from Taiwan

Abstract

This study examines the dynamic relationship among insurance demand, financial development and economic growth in Taiwan between 1961 and 2006. Using a three-variable Vector Autoregressive (VAR) model, the competing hypotheses of demand-following versus supply-leading are empirically tested. Extending the conceptual link among these variables proposed by Hussels et al. (2005), we find that there is an equilibrium relationship between demand, financial development and economic growth. In the short run, economic growth Granger causes insurance demand, and financial development Granger causes economic growth. In other words, financial development does promote real GDP growth, and a change in real GDP leads to deviation in real insurance demand in Taiwan. Managerial implications are proposed based on the empirical findings.

Keywords:

• insurance demand
• financial development
• economic growth
• Granger causality
• cointegration

JEL Classification:

• G21
• G22
• O16

Notes

This article has been republished with minor changes. These changes do not impact the academic content of the article.

¹As Patrick (1966) discusses, economic growth can be either supply-led through growth in financial development or, alternatively, financial development can be demand-led through growth in the economy.

²Swiss Reinsurance Company, Sigma Publications, No. 5/2006, Zurich.

³For the detailed contents of the economic growth rate, see website: http://www.dgbas.gov.tw

Note: Insurance penetration: premiums as share of GDP (%).Source: Swiss Reinsurance Company, Sigma Publications, 1997–2007.