Relationship among Insurance Demand ,Financial Development and Economic Growth: the Experience of Taiwan

• Main Authors: Yung-Wang Chang, 張永旺
• Other Authors: Roger C. Y, Chen
• Format: Others
• Language: en_US
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/14987263931764296047

博士 === 國立高雄第一科技大學 === 管理研究所 === 97 === This study examines the dynamic relationship between insurance demand and economic growth in Taiwan from 1956 through 2006. Using a multivariate vector autoregressive (VAR) model, the competing hypotheses of demand-following versus supply-leading are empirically tested. Utilizing a reduced-form bivariate VAR model, test results indicate that non-life insurance demand and economic growth are cointegrated. Furthermore, in the long run, economic growth was found to lead to non-life insurance expansion. This result supports the demand-following hypothesis for Taiwan. However, life insurance demand and economic growth were not found to be cointegrated. Life insurance demand did impact economic growth, but only in the short run. Moreover, three-variable VAR models were applied to extend the conceptual link among insurance demand, financial development, and economic growth, as proposed by Hussels et al. (2005). These results reveal that economic growth affects insurance demand, both in the long run and in the short run. Financial development, on the other hand, was found to primarily cause variations in insurance demand, but only in the long run. In addition, the results from the Granger causality test, based on the vector error-correction model (VECM), suggest a unidirectional causality. This causality runs from financial development to economic growth, which supports “the supply-leading hypothesis”. In contrast, the results also suggest that economic growth leads to increases in insurance demand, which supports “the demand-following hypothesis”. Thus, financial development does promote real gross domestic product (GDP) growth. These findings highlight the importance of financial development in Taiwan’s recent economic growth. However, it was determined that insurance spending does not promote economic growth. This study has two significant managerial implications. Firstly, these results can help the Taiwan government prioritize the allocation of resources that may stimulate national economic growth. Secondly, knowledge of the income elasticity of demand for insurance can assist insurance companies with insurance product consumption estimation.