What is The Role Of Economic Development by HeidiJohn


									                   What is the role of insurance
                    in economic development?
                                         Lael Brainard

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              Dr. Lael Brainard, Bernard L. Schwartz Chair in International
              Economics at the Brookings Institution and Zurich Financial
              Services International Advisory Council member.

              This paper has benefited from the helpful comments of Robert Gibbons,
              Daniel Hofmann and Roy Suter.

              This is the second paper in the Zurich Government and Industry Affairs thought leadership series.
              To request other papers in the series or additional copies, please call +41 44 625 27 37.

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                   What is the role of insurance
                   in economic development?

                              What role does insurance play in economic          Of course, even if the data did not support
                              development? Considerable attention has            a strong causal role for insurance as an
                              been devoted to evaluating the relationship        engine of overall aggregate growth, there
                              between economic growth and financial              might be a strong case for insuring the
                              market deepening. Most of what we have             poor on social welfare grounds that those
                              learned relates to banking systems and             at or below the poverty line are particularly
                              securities markets – with insurance receiving      vulnerable to catastrophic shocks to income
                              only a passing mention. Yet, while                 and consumption. And indeed, it appears
                              insurance, banking, and securities markets         that the gap between the potential social
                              are closely related, insurance fulfills            value of insurance and the transactions
                              somewhat different economic functions              costs of provision might be unusually wide
                              than do other financial services, and in turn      for the poorest segment of society, which
                              requires particular conditions to flourish and     explains the growing interest in micro-
                              to make a full economic contribution.              insurance on the part of non governmental
                                                                                 organizations and philanthropic
                              Fortunately, in the past few years, several
                                                                                 foundations, some of whom are partnering
                              interesting lines of research have begun to
                                                                                 with commercial providers.
                              map the specific contributions of insurance
                              to the economic growth process as well as
                                                                                 Contributions of Insurance to
                              to the well-being of the poor. The evidence        Growth and Development
                              suggests that insurance contributes                Insurance serves a number of valuable
                              materially to economic growth by improving         economic functions that are largely distinct
                              the investment climate and promoting a             from other types of financial intermediaries.
                              more efficient mix of activities than would        In order to highlight specifically the unique
                              be undertaken in the absence of risk               attributes of insurance, it is worth focusing
                              management instruments. This contribution          on those services that are not provided by
                              is magnified by the complementary                  other financial services providers, excluding
                              development of banking and other                   for instance the contractual savings features
                              financial systems.                                 of whole or universal life products.
                              Empirical studies suggest that nonlife             The indemnification and risk pooling
                              insurance contributes to growth in countries       properties of insurance facilitate commercial
                              at many different levels of development. Life      transactions and the provision of credit by
                              insurance makes a substantial contribution         mitigating losses as well as the
                              to growth mostly in wealthier countries,           measurement and management of non
                              since life insurance is typically a smaller part   diversifiable risk more generally. Typically
                              of the total insurance market in low income        insurance contracts involve small periodic
                              countries. The relationship between per            payments in return for protection against
                              capita income levels and insurance                 uncertain, but potentially severe losses.
                              penetration is also strong in the reverse          Among other things, this income smoothing
                              direction – with rising income a strong            effect helps to avoid excessive and costly
                              driver of life insurance coverage. However, it     bankruptcies and facilitates lending to
                              is difficult to disentangle whether lower          businesses. Most fundamentally, the
                              insurance consumption at lower income              availability of insurance enables risk averse
                              levels reflects reduced demand for life            individuals and entrepreneurs to undertake
                              insurance products or constraints on the           higher risk, higher return activities than they
                              supply side associated with weak regulatory        would do in the absence of insurance,
                              and supervisory environments and high              promoting higher productivity and growth.
                              costs of insurance provision.

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                                                               What is the role of insurance in economic development?

              The management of risk is a fundamental           Insurers also have an incentive to control
              aspect of entrepreneurial activity.               losses, which is a significant social benefit.
              Entrepreneurs manage the risk of accidental       By offering discounts for seat belts, smoke
              loss by weighing the costs and benefits of        detectors, or other measures that reduce
              each alternative. In a structured risk            the frequency or severity of losses, they
              management process, this involves: (1)            lower their eventual claims costs, in the
              identifying the exposures to accidental loss;     process saving lives and reducing injuries.
              (2) evaluating alternative techniques for
                                                                On the investment side, due to the long
              treating each loss exposure; (3) choosing
                                                                term nature of their liabilities, sizeable
              the best alternative; and (4) monitoring the
                                                                reserves, and predictable premiums,
              results to refine the choices. Those who do
                                                                life insurance providers can serve an
              not apply a structured process still make
                                                                important function as institutional investors
              decisions about risk, although sometimes by
                                                                providing capital to infrastructure and other
              default rather than design. The scope of an
                                                                long term investments as well as
              economy’s insurance market affects both
                                                                professional oversight to these investments.
              the range of available alternatives and the
                                                                Of course, these benefits are fully realized
              quality of information to support decisions.
                                                                only in markets where insurance providers
              For example, a manufacturer might produce         invest a substantial portion of their
              only for the local market, forgoing more          portfolios domestically.
              lucrative opportunities in distant markets in
                                                                The net result of well functioning insurance
              order to avoid the risk of losing goods in
                                                                markets should be better pricing of risk,
              shipment. Transport insurance can mitigate
                                                                greater efficiency in the overall allocation
              this loss exposure and enable the
                                                                of capital and mix of economic activities,
              manufacturer to expand. Similarly, to avoid
                                                                and higher productivity. Importantly, these
              the risk of total loss from drought, a
                                                                unique functions of insurance should be
              commercial farmer may keep half of his
                                                                complementary to banking and financial
              seed in reserve. Crop insurance can protect
                                                                sector deepening more broadly. For
              against drought and permit all of the seed
                                                                instance, insurance facilitates credit
              to be planted for a smaller premium than
                                                                transactions such as the purchase of
              the cost of holding half in reserve. Thus
                                                                homes and cars and business operations,
              public policies that encourage insurance
                                                                while depending in turn on well
              operations improve the economy’s
                                                                functioning payment systems and robust
              productivity by broadening the range
                                                                investment opportunities.
              of investments.

              Insurers also contribute specialized expertise
              in the identification and measurement of
              risk. This expertise enables them to accept
              carefully specified risks at lower prices than
              non-specialists. They also have an incentive
              to collect and analyze information about
              loss exposures, since the more precisely
              they measure the cost of risk, the more
              they can expand. As a result, the insurance
              market generates price signals to the entire
              economy, helping to allocate resources to
              more productive uses.


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              What is the role of insurance in economic development?

                                Measured Contribution of                          Separate evidence that a growing presence
                                Insurance to Growth                               of life insurance providers and pension
                                Given the multiple potential benefits of          funds is associated with more efficient
                                a vibrant insurance sector, how much of           banks suggests that they promote some
                                a contribution does insurance make in             capital market discipline on the investment
                                practice? While still sparse, the research        side that is also complementary.5
                                points to several relatively robust inferences:
                                                                                  Drivers of Insurance Coverage
                                1: Insurance Contributes Positively to            Of course, if growing insurance markets
                                Economic Growth.                                  make a positive contribution to growth,
                                The deepening of insurance markets makes          then it is important to understand in turn
                                a positive contribution to economic growth.       the enabling factors that contribute to the
                                While life insurance is causally linked to        development of robust insurance markets.
                                growth only in higher income economies,           Here, the evidence points to rising incomes,
                                nonlife insurance makes a positive                macroeconomic stability, and financial
                                contribution in both developing and higher        deepening as the key drivers of insurance
                                income economies.1 Some research suggests         market growth, against the backdrop
                                that the positive contribution of life            of a conducive regulatory and
                                insurance to growth is primarily through the      supervisory environment.
                                channel of financial intermediation and long
                                term investments. However, it is important        1: Rising Incomes, Moderate Inflation,
                                to note that these studies do not address         and Financial Deepening are Key Drivers.
                                the important contributions to individual         Growth in insurance coverage is strongly
                                and social welfare from risk management.2         associated with rising incomes, the
                                                                                  development of an increasingly
                                2: Strong Complementarity between                 sophisticated banking sector, and low or
                                Insurance and Banking.                            moderate levels of inflation.6 The strong
                                Insurance and banking system deepening            contribution of rising incomes to greater
                                appear to play complementary roles in the         insurance coverage might be attributable to
                                growth process. Although insurance and            demand factors (rising demand for coverage
                                banking separately each make positive             as individuals become wealthier), supply
                                contributions to growth, their individual         factors (it becomes more cost-effective to
                                contributions are greater when both are           provide insurance as the economy expands,
                                present.3 There is also some evidence             providing both a stronger institutional
                                that the development of insurance                 environment and greater returns relative to
                                markets contributes to the health of              transactions cost), or a combination.
                                securities markets.4
                                                                                  The overall institutional environment plays
                                As suggested above, there are many                an important role, in terms of political
                                reasons why this complementary                    stability and openness as well as
                                relationship might hold, including the            government effectiveness, rule of law, and
                                likelihood that the presence of property          control of corruption. Religious factors also
                                casualty insurance avoids inefficiently high      play a role, with insurance consumption
                                levels of bankruptcy and helps to facilitate      inversely correlated to the share of the
                                credit transactions for houses, consumer          population that is Islamic.
                                durables, and small- and medium-sized
                                businesses that banks typically finance.


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                                                              What is the role of insurance in economic development?

              A number of factors that might be assumed        Indeed, even after controlling for income,
              to be strong drivers of insurance market         there is substantial heterogeneity in
              growth appear much less significant in           insurance coverage between regions (with
              practice, including demographic factors,         Latin America and the Middle East lagging
              such as the share of the population that is      behind) and even among different countries
              approaching or at retirement relative to the     within regions (a handful of countries in
              share that is young, and the educational         Latin America have much deeper insurance
              level of the population. Notably, social         markets than the remainder). Analysis of
              provision of insurance, such as social           the heterogeneity even within the group of
              security and government health insurance,        relatively wealthy OECD member countries
              appears to grow in tandem with the               leads some analysts to conclude that a full
              provision of private insurance perhaps           understanding of the relationship between
              because both are associated with increasing      insurance and growth requires some
              incomes – rather than acting as substitutes      analysis of cultural and institutional
              as some have conjectured. In addition, even      characteristics within individual countries.7
              though urbanization might be expected to
                                                               At minimum, the high degree of
              lead to growth in insurance coverage due
                                                               heterogeneity might suggest that attitudes
              to the associated separation from traditional
                                                               towards insurance and risk must be taken
              informal insurance practices prevalent in
                                                               into account in the development of country
              rural settings, urbanization does not appear
                                                               and regional insurance markets. Related, it
              to be a significant driver.
                                                               suggests an important role for industry-
                                                               wide initiatives on consumer education and
              2: Variation in Insurance Coverage.
                                                               self-regulation in addition to the
              Although the key drivers noted above are
                                                               development of trustworthy regulatory and
              relatively robust in explaining insurance
                                                               supervisory frameworks as the globalization
              market coverage, nonetheless there is
                                                               of insurance markets proceeds.
              substantial variation in insurance coverage
              among economies that cannot be fully
              explained by these factors. This suggests
                                                               The contribution of insurance to an
              some idiosyncratic factors may be at work.
                                                               economy’s growth and efficiency is not the
              Observers have noted an S-curve                  only entry point into its role in development.
              relationship between per capita income and       The contribution of insurance to poverty
              insurance penetration: insurance penetration     alleviation and the welfare of the poor is
              is moderately positively correlated with per     also potentially of considerable importance,
              capita income within the group of low            although the quantitative evidence on this
              income countries and the same is true for        point is not on very firm grounding.
              the highest income countries. However,           Nonetheless, case studies and other
              within the group of middle income                qualitative evidence make a persuasive case
              countries, insurance penetration is strongly     that the potential social value of so-called
              positively correlated with per capita income.    micro-insurance provision to poor
              This S-curve is somewhat misleading              households and small-scale entrepreneurs
              however, since it compares countries at          warrants a great deal more experimentation
              different levels of per capita income, but       with business models and products to
              does not predict how insurance penetration       develop scaleable approaches that combine
              will rise as an individual country becomes       commercial and philanthropic elements.
              wealthier over time.


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                   What is the role of insurance in economic development?

                                    As noted above, patterns of insurance              There are also a variety of mechanisms that
                                    coverage suggest a positive correlation with       have emerged at the community level, such
                                    income – at least up to a point where the          as community pooling of informal insurance
                                    value of insurance begins to diminish              contributions to cover burial costs.
                                    relative to the value of overall household         Community-based insurance mechanisms
                                    assets. But this does not tell us anything         surmount the problems of transactions
                                    about the potential social value of insurance      costs and lack of legally enforceable
                                    provision at lower levels of income – only         contracts through personal relationships
                                    that poor consumers either do not or               and piggybacking on traditional small-scale
                                    cannot purchase insurance at currently             financial collection mechanisms, similar to
                                    prevailing prices and availability. Moreover,      the early stages of micro-credit. However,
                                    insurance market development faces many            they offer only feeble protection in the face
                                    special informational challenges that have         of community-wide, covariate shocks, since
                                    been extensively documented in economic            they do not typically pool risk across
                                    research even in wealthier countries. Put          broader populations and are limited in
                                    simply, insurance is likely to be relatively       the types of products they can provide.
                                    more expensive – even prohibitively so –
                                                                                       For micro entrepreneurs and farmers, the
                                    for low income households and small-scale
                                                                                       net result can be a significant drag on
                                    entrepreneurs because of the high
                                                                                       overall economic performance as they
                                    informational problems and transactions
                                                                                       choose to invest in activities that might offer
                                    costs relative to the size of the risk to be
                                                                                       the best risk-return profile from an individual
                                    insured. As a result, most types of insurance
                                                                                       point of view but are suboptimal from an
                                    are simply not available to the vast majority
                                                                                       economy-wide point of view where a higher
                                    of the world’s poorer citizens.8
                                                                                       returning but riskier set of investments
                                    In the absence of risk pooling mechanisms,         might lead to better aggregate outcomes.
                                    plunges in incomes due to death, disability,
                                                                                       High transactions costs are the main
                                    and adverse agricultural outcomes often
                                                                                       impediment standing in the way of a
                                    translate into substantial decreases in
                                                                                       systematic shift from informal to formal
                                    consumption and investment that can
                                                                                       mechanisms for managing and pooling risk
                                    permanently set back a poor family’s
                                                                                       for poorer households and small
                                    livelihoods and prospects. When drought or
                                                                                       entrepreneurs. As such, the emerging field
                                    floods lead to low agricultural yields, critical
                                                                                       of micro-insurance faces many of the same
                                    health interventions may be delayed,
                                                                                       challenges faced by micro-credit two
                                    education of younger members of a
                                                                                       decades ago in developing creative
                                    household put on hold indefinitely, and
                                                                                       mechanisms for reducing or subsidizing
                                    land, livestock or equipment permanently
                                                                                       transactions costs. Indeed, micro-credit
                                    forfeited. Due to the catastrophic
                                                                                       institutions are among the first to venture
                                    consequence of such losses, there is
                                                                                       into micro-insurance products, and their
                                    extensive evidence that in the absence of
                                                                                       most popular initial insurance product
                                    formal insurance poor households and
                                                                                       offering was ‘credit-life’ insurance to pay
                                    communities attempt to ‘self-insure’
                                                                                       off any debts associated with outstanding
                                    through a combination of building assets9
                                                                                       micro-credit loans in the event of death.
                                    and diversifying sources of income. The
                                                                                       As this field expands, it might follow a
                                    result most likely is investment in a set of
                                                                                       trajectory similar to that of micro-finance,
                                    lower risk but also lower return activities –
                                                                                       perhaps starting with NGO providers
                                    and even this degree of self-insurance is
                                                                                       funded on a philanthropic basis, but rapidly
                                    highly incomplete.


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                                                              What is the role of insurance in economic development?

              expanding to include commercial partners        the capital markets. In areas of Asia
              as financial intermediaries as scaleable        and Africa, there is growing interest in
              business models emerge.                         weather derivatives to insure against
                                                              weather-associated agricultural losses.
              In parallel, in some countries the public
                                                              These are designed to sidestep the
              sector is taking a greater interest in the
                                                              traditional incentive (moral hazard)
              provision of social insurance to poorer
                                                              problems associated with crop insurance
              populations – through subsidized public
                                                              by using independent measurements of
              insurance schemes for health, natural
                                                              weather outcomes such as rainfall rather
              disasters, or weather-related crop insurance.
                                                              than crop yields.
              Government mandates for compulsory
              insurance also expand the covered
                                                              3: Health Insurance
              population although the difficulty of
                                                              As with the wealthier economies, the
              achieving risk-based pricing can lead to
                                                              development of health insurance markets in
              market distortions.
                                                              developing economies depends on the
                                                              composition of health delivery providers –
              1: Household Insurance:
                                                              whether private or public – and the
              Micro-finance providers and other
                                                              government’s involvement in health
              community-based financial intermediaries
                                                              insurance provision. However, there is a
              have begun to diversify into insurance
                                                              strong tendency in poorer economies for
              products. In Uganda, 2 million people have
                                                              households to bear responsibility for paying
              purchased life insurance bundled with
                                                              a much higher proportion of overall health
              savings and micro-credit. Burial insurance is
                                                              costs out of pocket than in richer
              growing rapidly in other areas, and there are
                                                              economies, which leads to underinvestment
              some experiments with property insurance
                                                              in health services (particularly on the
              such as for livestock and dwellings.
                                                              preventive side) and vulnerability to health-
              2: Natural Disasters, Weather, and              related consumption shocks. Thus, a strong
              Crop Insurance                                  case can be made for improving health
              There should be enormous potential for          outcomes in poor countries through a varied
              natural disaster and weather insurance to       combination of public and private insurance
              improve the performance of lower income         provision depending on the institutional
              economies, which tend to be more                setting. Indeed, countries such as Mexico
              vulnerable to high volatility in incomes due    and Colombia have undertaken interesting
              to commodity price fluctuations and natural     reforms in this area in recent years, and this
              disasters due to poor building codes and        is likely to be an area of strong growth.
              infrastructure. Current investments in new
                                                              4: Small-Scale Entrepreneurs
              products and innovations in weather and
                                                              The economic contribution of small
              natural disaster insurance should be
                                                              enterprises to middle- and high-income
              followed closely, as it is anticipated that
                                                              economies is well-known. However, in many
              climate change will exacerbate the
                                                              poor economies, start-ups and small-scale
              incidence of weather patterns and natural
                                                              enterprise fall short of their potential due to
              disasters in many poor areas.
                                                              a variety of barriers, including access to
              In recent years, the World Bank and other       capital. As attention to these barriers grows,
              donors have been involved in experiments        it is critical to put insurance high on the list.
              in countries such as Turkey and Mexico that     While the risk appetite of large corporations
              provide earthquake risk insurance financed      can be debated, small scale entrepreneurs
              through a combination of reinsurance and        whose household wealth is tied up in their

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              What is the role of insurance in economic development?

                                business enterprises are undoubtedly               these are necessary but not sufficient
                                preoccupied with managing risk. In the             conditions. Insurance market deepening also
                                absence of risk management tools provided          depends on the scale and growth of related
                                by formal insurance, there will be a tendency      markets, including sales of cars and other
                                to under invest in higher risk, higher return      consumer durables, residential and
                                activities, thus diminishing the potential         commercial mortgage markets, business
                                contribution of the critical small and medium      establishments, disposable income, and
                                sized enterprise sector to employment,             commercial and trade transactions, to name
                                investment, and growth overall.                    a few. Growth in these related markets is
                                                                                   critical in order for the nascent insurance
                                In sum, extending accessible insurance
                                                                                   industry to reach scale in developing shared
                                products to poor households and small
                                                                                   infrastructure, underwriting capacity,
                                scale entrepreneurs should be a core part of
                                                                                   statistical databases for actuarial purposes,
                                the agenda of democratizing access to
                                                                                   and the associated skills.
                                financial assets. When successful programs
                                are taken to scale, it will not only add           A variety of public goods are critical for
                                measurably to social welfare but also hold         jump starting and sustaining the growth of
                                the promise of generating a more                   domestic insurance markets. These include
                                productive and higher growth mix of                the collection and sharing of data on a
                                activities and investments – with a payoff         consistent basis, common supervisory
                                perhaps greater than micro-credit.                 principles, for instance on reserves and
                                                                                   solvency, and consumer education.
                                Globalization of Insurance markets                 Recognizing the critical role of such public
                                Although the evidence suggests that                goods, several of the multinational
                                insurance market deepening should be a             development banks, international
                                priority in the financial sector strategies of     associations of regulators and supervisors as
                                developing countries, awareness of the role        well as private sector associations are
                                of insurance lags behind that of banking           already active in providing technical
                                and capital markets. For these reasons, it is      assistance on all of these dimensions.11
                                important to raise the visibility of this sector
                                                                                   According to an in-depth survey of the
                                and to clarify what unique regulatory
                                                                                   factors that have slowed the expansion of
                                provisions might be needed to enable
                                                                                   insurance markets in Latin America, the
                                insurance market development alongside
                                                                                   region’s insurance professionals view the
                                other facets of financial deepening. For
                                                                                   lack of sufficient education about insurance
                                many countries, a good starting point
                                                                                   as the greatest impediment to market
                                would be to include analysis and
                                                                                   development. They also cited lack of
                                recommendations specifically for insurance
                                                                                   confidence in the effectiveness of the
                                in financial sector assessments.10
                                                                                   judicial system and law enforcement’s
                                1: Institutional Foundations for Insurance         failure to collect information about thefts
                                Market Development                                 and automobile accidents as key
                                The development of robust insurance                impediments to market development.12
                                markets generally requires many of the
                                same foundations as for banking and                2: Insurance for Different Stages of
                                                                                   Economic Development
                                financial market deepening: reasonable
                                                                                   Although there is broad agreement on the
                                macroeconomic and political stability, clear
                                                                                   need for adequate regulatory and
                                property rights, enforceability of contracts,
                                                                                   supervisory frameworks, there is some
                                and safeguards against corruption. However,
                                                                                   debate on the content of these frameworks,

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                                                              What is the role of insurance in economic development?

              and in particular the extent to which            through the growing volume of transactions
              developing countries can or should               requiring insurance – and directly – by
              harmonize their standards to global best         driving privatization and liberalization of
              practice or seek some intermediate               insurance markets and the migration of
              standards. Global best practices relying on      new products across borders.
              disciplined transparency and corporate
                                                               As global insurance companies press
              governance are still largely lacking in many
                                                               forward on cross-border market
              developing countries. For some regions
                                                               liberalization, they would be well-advised
              within Africa and Latin America, a strong
                                                               to advocate just as actively for building
              case can be made for the development of
                                                               consumer confidence in the regulatory and
              regional standards that are common across
                                                               supervisory infrastructure of emerging
              groups of neighboring countries or Free
                                                               insurance markets. Global industry leaders
              Trade Agreement (FTA) partners. Regional
                                                               may find their victories short lived if they
              harmonization offers many benefits, and it
                                                               win major concessions in new markets on
              can be a step toward global standards.
                                                               insurance market liberalization through
              The International Association of Insurance
                                                               WTO and bilateral free trade agreement
              Supervisors has articulated the Core
                                                               negotiations, without putting appropriate
              Principles of Insurance Supervision, but the
                                                               emphasis on the concurrent development
              implementation of those Core Principles has
                                                               of regulations and prudential supervision as
              barely begun.
                                                               well as industry self-regulation. The hard
              Given the evidence connecting insurance          won market opening can backfire when
              market takeoff to achievement of middle          the actions of a handful of poorly regulated
              income status, a case can be made that low       domestic providers undermine consumer
              income economies below this threshold            trust, leading to adverse reputation
              should concentrate limited resources on          effects for all providers that may take
              either specific insurance segments (such         years to overcome.
              as natural disaster risk mitigation) or other
              sectors. In countries with limited capacity,     The Road Ahead
              it makes sense to undertake institutional        The evidence suggests there is substantial
              development sequentially – for instance          potential for insurance to make a greater
              focusing initially on laws and regulations       contribution to economic growth and social
              that are foundational for overall financial      welfare in many lower and middle income
              sector expansion rather than specific to         countries. Indeed, industry experts argue
              insurance. In parallel, the growing field of     that insurance lags behind other financial
              micro-insurance is likely to yield products      services in the extent of globalization,
              and business models that contribute to           providing substantial growth
              social welfare and small enterprises in low      opportunities.13 The large variation in
              income economies, while establishing broad       insurance coverage among countries at
              familiarity with formal insurance and setting    similar income levels, strong trend
              the stage for future growth as income rises.     aggregate growth and stability in a large
                                                               number of lower and middle income
              3: Trade and Investment Liberalization           economies, and diminishing domestic
              and Insurance Markets                            market concentration in several countries all
              Expanding cross-boarder trade and                point to significant growth potential for
              investment will remain key drivers of            insurance – with concomitant benefits for
              insurance market growth. Trade fuels             productivity, growth, and welfare.
              insurance market growth both indirectly –


124935A01.indd 8                                                                                                       14/1/08 14:49:09

                          Marco Arena, ‘Does Insurance Market Activity Promote Economic Growth? A Cross-Country
                         Study for Industrialized and Developing Countries,’ World Bank Policy Research Working
                         Paper 4098, December 2006. M. Conyon and D. Leech, ‘Top Pay Company Performance and
                         Corporate Governance,’ Oxford Bulletin of Economics and Statistics, Volume 56, No. 3, pp.
                         229-47, 1994.
                           Hak Hong Soo, ‘Life Insurance and Economic Growth: Theoretical and Empirical
                         Investigation,’ University of Nebraska, Department of Economics, 1996.
                           There is some contrary evidence on this point. Thus, for instance, Adams et al (2005) find
                         that banking sector growth but not insurance market growth preceded growth in Sweden.
                         While in some specifications life and nonlife insurance do not appear to be significant
                         contributors to growth in the presence of an interaction term with banking, subsequent
                         research such as Ian P. Webb, Martin F. Grace, and Harold D. Skipper, ‘The Effect of Banking
                         and Insurance on the Growth of Capital and Output,’ Center for Risk Management and
                         Insurance Working Paper 02, Georgia State University, 2002, suggests the independent
                         contribution of insurance is robust to the inclusion of banking sector variables, and higher
                         levels of insurance and banking penetration jointly produce a greater effect on growth than
                         their individual contributions combined.
                           Gregorio Impavido, Alberto R. Musalem, and Therry Tressel, ‘Contractual Savings
                         Institutions and Banks’ Stability and Efficiency,’ Policy Research Working Paper,
                         the World Bank, 2001.
                          Gregorio Impavido, Alberto R. Musalem, and Therry Tressel, ‘The Impact of Contractual
                         Savings Instritutituions on Securities Markets,’ World Bank Policy Research Working Paper
                         2498, 2003.


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                                                             What is the role of insurance in economic development?

               Thorsten Beck and Ian Webb (2003), ‘Economic, Demographic, and Institutional
              Determinants of Life Insurance Consumption across Countries,’ The World Bank Economic
              Review, Vol. 17, No. 1, pp. 51-88.
                Damian Ward and Ralf Zurbruegg, ‘Does Insurance Promote Economic Growth? Evidence
              from OECD Countries,’ The Journal of Risk and Insurance, Vol. 67, No. 4, pp. 489-506, 2003.
               Jonathan Morduch, ‘Micro-Insurance: the Next Revolution,’ forthcoming in What have We
              Learned about Poverty, Abhijit Banerjee, Roland Benabou, and Dilip Mookherjee (eds.),
              Oxford University Press, June 2004, provides an excellent reference for this section. See also
              Stijn Claessens, ‘Access to Financial Services: A Review of the Issues and Public Policy
              Objectives,’ World Bank Policy Research Working Paper 3589, May 2005.
                   Caroline Moser, Reducing Global Poverty, Brookings Press, 2007.

               USAID, ‘Assessment on How Strengthening the Insurance Industry in Developing Countries

              Contributes to Economic Growth,’ February 15, 2006.

               USAID, ‘Assessment on How Strengthening the Insurance Industry in Developing Countries

              Contributes to Economic Growth,’ February 15, 2006.
                Pietro Masci, Luis Tejerina, and Ian Webb, ‘Insurance Market Development in Latin America
              and the Caribbean,’ Inter-American Development Bank Sustainable Development Department
              Technical Papers Series, IFM-146, 2007.

               Robert Gibbons, ‘The Global Insurance Market Comes of Age,’ International Insurance

              Quarterly, Number 2, Volume 14, June 2007.


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      A0 (/0)

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