Insurance Sector Development & Economic Growth in Malaysia

According to the finance-growth nexus theory, financial development promotes economic growth through channels of marginal

productivity of capital, efficiency of channeling savings to investment, saving rate and technological innovation (Levine, 1997).

Financial intermediaries

companies such as insurance realized economic growth.

They play an important role in

economic growth as they are the risk

management tool for individuals and

companies.

In line with the increasing share in

the aggregate financial sector in

almost every developing country, the importance of

insurance is growing compared from the

past.

SNH ©

Widening income disparity and globalization are the issues that increase possible impact on the economic development as insurance companies are one of the biggest institutional investors in stock, bond and real estate markets.

Besides that, it is important for the stability of the economy to have access on insurance services and this can make the business participants accept aggravated risk.

Insurance companies are playing an important role by enhancing internal cash flow at the assured and by creating large amount of assets placed on the capital market.

SNH ©

As we all know, insurance sector is one of the industries that contributing to Malaysia

since1988.The aim is to support the economy through the financial system besides

providing Malaysian consumers with world class

product and services.

According to BNM, the market penetration increased significantly from the total

insurance fund assets and average asset base per insurance fund increased by 545.9% and

521% respectively during the period from 1988 to 1999.It shows that insurance sector

has played a role in expanding economic activities and growth.

However, there is still lack of clear view on the impact,

rationale, and relationship between the sector and

Malaysia’s economy. This study was emphasizing on the

relation and focusing the matter specifically in

Malaysia.

SNH ©

The main objective of this study is to investigate the link between the insurance sector

development and economic growth of Malaysia and to fill a gap in the current finance-growth

nexus.

SNH ©

To define the purpose of insurance sector in

Malaysia

To identify whether the development of the

sector help economic growth

To know how the sector development

give impacts towards economic growth

To know the relevancy of the sector

development for coming years

To determine the ways to encourage the sector

development effectively

SNH ©

What are the purposes of

insurance sector in Malaysia?

Does the development of the

sector help economic growth?

How does the sector development

influence economic growth?

Should government continue the sector

development?

What are the ways to develop the sector in more

effectively?

SNH ©

It is expected that all the explanatory variables

except inflation rate (INF) should be positively related to GDP while inflation rate

(INF) is expected to be negative in relation to GDP

SNH ©

Hughes (1996)

The impact of unemployment

insurance on unemployment

duration.

The unemployment

insurance benefit give more impact

to high wage group as

compared to counterpart.

The study reveals that individual with high wage

experience shorter

unemployment period.

SNH ©

Ward and Zurbruegg (2000)

• Granger causality to analyze the relationships between insurance premiums and economic growth from nine OECD countries from 1961 to 1996.

• The relationships between insurance market and economic growth is dependent on country and whether the insurance industry promote economic growth depends on a number of national circumstance.

Lim and Haberman (2003)

• The interest rate for savings deposits and price is significant in the equation.

• The positive sign for the interest rate puzzles the authors. This could be in line with findings of Webb et al. (2002) who found the best results when insurance and banking sector are combined in the estimates.

SNH ©

Arena and Marco (2006)

• They used the average rate of real per capita GDP growth.

• Life and non-life insurance premium has a positive and significant impact on the economic growth.

• In the case of life insurance the impact on economic growth is only experience by high-income countries only. The result is also being the same for the non-life insurance.

SNH © SNH ©

Marijuana et al. (2009)

• Examined the relationship between insurance sector development and economic growth in 10 transition European Union member countries.

• Three different insurance variables were used; life, non-life and total insurance and other control variables like education, openness, inflation, investment, bank credit, stock capitalization.

• insurance sector development positively and significantly affects economic growth.

Oke and Ojo (2012)

• Examined the short and long-run relationships between economic growth and insurance sector development in the Nigerian economy.

• Gross domestic product (GDP) was used as proxy for the level of economic growth.

• The result shows that insurance sector growth and development positively and significantly affects economic growth.

• However, from the Granger causality test, it shows that the influence of insurance sector growth on economic growth was limited due to cultural, attitudinal traits and values in the country.

SNH ©

SNH ©

GDP

ASSET OF LIFE

INSURANCE

INFLATION RATE

ASSET OF NON-LIFE

INSURANCE

SNH ©

SNH ©

GDP=f (ALI, INF, NLA)

SNH ©

GDP= Bo + B1ALI + B2INF + B3NLA + μ

SNH ©

We estimate standard growth equation using a dataset over the period 2000-2010.

Based from the main journal that we have studied, the model adopted gross domestic product (GDP) growth as dependent variable while life, non-life and total insurance as independent variable.

The model used is modified by using gross domestic product (GDP) at market price as the dependent variable, furthermore the insurance assets is divided into assets of life and non-life insurance. Inflation rate is chosen as the control variable.

SNH ©

GDP LFE GNRL INF

Mean 22756.23 83815.95 19155.19 2.150909

Median 23388.50 79739.55 18689.23 1.685000

Maximum 25008.00 153877.2 26975.62 8.200000

Minimum 19849.92 33950.00 13944.00 -2.000000

Std. Dev. 1476.065 35850.97 3936.271 1.789125

Skewness -0.770812 0.307370 0.419243 1.248944

Kurtosis 2.294566 1.888529 2.012071 6.636015

Jarque-Bera 5.269441 2.957668 3.078281 35.67675

Probability 0.071739 0.227903 0.214565 0.000000

Sum 1001274. 3687902. 842828.4 94.64000

Sum Sq. Dev. 93687011 5.53E+10 6.66E+08 137.6416

Observations 44 44 44 44

SNH ©

GDP LFE GNRL INF

GDP 1.000000 0.711388 0.681082 0.317363

LFE 0.711388 1.000000 0.997031 0.172067

GNRL 0.681082 0.997031 1.000000 0.153563

INF 0.317363 0.172067 0.153563 1.000000

SNH ©

All variables except the inflation rate (INF) are positively correlated with the gross domestic product (GDP)

There is a relationship between life insurance total assets and general insurance total assets with gross domestic product where the value for life insurance total assets is 0.711 and the value for general insurance total assets is 0.681

SNH ©

Dependent Variable: GDP

Method: Least Squares

Date: 11/22/12 Time:

15:10

Sample: 2000Q1 2010Q4

Included observations: 44

SNH ©

Variable Coefficient Std. Error t-Statistic Prob.

LFE 0.208745 0.051407 4.060603 0.0002

GNRL -1.647054 0.466764 -3.528664 0.0011

INF 98.55762 80.27478 1.227753 0.2267

C 36597.70 4699.812 7.787056 0.0000

R-squared 0.653196 Mean dependent var 22756.23

Adjusted R-squared 0.627186 S.D. dependent var 1476.065

S.E. of regression 901.2635 Akaike info criterion 16.53198

Sum squared resid 32491037 Schwarz criterion 16.69418

Log likelihood -359.7036 F-statistic 25.11297

Durbin-Watson stat 0.523075 Prob(F-statistic) 0.000000

SNH ©

The R-squared is 0.6531 which shows that 65.31% of the GDP can be explained by the 3 independent

variables.

The t-Statistic for life insurance total asset is 4.060 which indicate that the variable is significant. Same goes to general insurance total asset, the value of t-Statistic is -3.528.

The negative sign of the value can be ignored. However the t-Statistic for

inflation rate is less than 2.0, therefore the variable is not significant.

SNH ©

The Durbin Watson statistic falls on 0.523 which indicates a reject H0 with the evidence

of positive correlations between the variables

SNH ©

Using the data of the total asset of both life and non-life

insurance from the period of 2000- 2010, we examined the insurance sector contribution

towards the economic growth in Malaysia

Results of the analysis are consistent with our hypothesis,

and consistent with previous studies who study the impact of insurance on economic growth in

Nigeria

SNH ©

More study should be done to get the exact accurate data of

the insurance sector contribution towards the economic growth

This shall include the insurance services provided by banks or

formerly known as bancassurance and may also

include takaful sector as a whole

The variables used may also be diversified to accommodate the current changes of the economic

growth

SNH ©

• Adeyemi M (2005). “An Overview of the Insurance Act 2003”. Issues in Merger and Acquisition for the Insurance Industry. pp. 61-78 (ED) Ezekiel. O.C. Being Proceeding of the 2003 NIA Workshop on Insurance ACT 2003. Nigeria Insurance Association.

• Ćurak, Lončar and Poposki (2009). “Insurance Sector Development and Economic Growth in Transition Countries”. International Research Journal of Finance and Economics - Issue 34 (2009).

• Kjosevski (2011). “Impact of Insurance on Economic Growth: The Case of Republic Macedonia”. Pp. 34-39. Volume 4, 2011. Stopanska Banka AD, Skopje, Republic of Macedonia

• Levine R (1997). “Financial development and Economic Growth: views and agenda”. J. Economy. Lit., 35(2): 688-726.

• Oke, Ojo (2012) “Insurance Sector Development and Economic Grwoth in Nigeria” pp. 7016-7023, Vol. 6(23), 13 June 2012, African Journal of Business Management

• Skipper, H. D., 1997, Foreign Insurers in Emerging Markets: Issues and Concerns, Occasional Paper • 97-2, Center for Risk Management and Insurance. • Retrieved from http://www.kooagency.com.my/about_insurance_history.htm • Retrieved from

http://www.fstep.org.my/media/File/Overview%20Week%20Notes/En%20Eddy_Evolution%20of%20Malaysian%20Insurance%20Industry_150411_Lonpac.pdf

• Retrieved from https://editorialexpress.com/cgibin/conference/download.cgi?db_name=ACE10&paper_id=35

SNH ©