insurance sector development & economic growth in malaysia
DESCRIPTION
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. Research Based.TRANSCRIPT
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.
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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.
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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.
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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.
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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
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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?
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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
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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.
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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.
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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.
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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.
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GDP
ASSET OF LIFE
INSURANCE
INFLATION RATE
ASSET OF NON-LIFE
INSURANCE
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GDP=f (ALI, INF, NLA)
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GDP= Bo + B1ALI + B2INF + B3NLA + μ
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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.
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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
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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
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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
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Dependent Variable: GDP
Method: Least Squares
Date: 11/22/12 Time:
15:10
Sample: 2000Q1 2010Q4
Included observations: 44
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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
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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.
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The Durbin Watson statistic falls on 0.523 which indicates a reject H0 with the evidence
of positive correlations between the variables
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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
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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
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• 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
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