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Insurance and economic policy uncertainty

Mehmet Balcilar, Rangan Gupta, Chien-Chiang Lee and Godwin Olasehinde-Williams

Research in International Business and Finance, 2020, vol. 54, issue C

Abstract: Just as the world has witnessed the increased importance of the insurance sector over the past few decades, it has also witnessed a sharp rise in risks and uncertainties. Surprisingly, studies analyzing the relationship between economic policy uncertainty and the insurance sector are almost non-existent. Another major limitation of insurance literature is the choice of methodology. Most studies on the insurance sector do not take into consideration issues of heterogeneity and cross-sectional dependence, and are therefore subject to errors. To address the identified gaps, this research investigates the impact of economic policy uncertainty on insurance premiums in a panel of 15 countries over the period 1998–2016 by employing heterogeneous panel estimation techniques with cross-sectional dependence. The Durbin-Hausman cointegration tests of Westerlund (2008) confirm that a long-run relationship exists between the variables. Findings from the error correction based panel estimations show that the insurance sector is not immune to the effects of economic policy uncertainty. Economic policy uncertainty raises insurance premiums both in the short and long run, although the long-run impact is greater than the short-run impact. In addition, economic policy uncertainty exerts a bigger influence on non-life insurance premium than on life insurance premium, indicating that the economic risks covered by non-life insurance are more sensitive to uncertainty than the mortality and longevity risks covered by life insurance. Our findings further show that national income, education, population, financial development and institutional quality all raise insurance premiums, while inflation lowers insurance premiums.

Keywords: Economic policy uncertainty; Insurance premium; Short- and long-run relationships; Panel data (search for similar items in EconPapers)
JEL-codes: C33 G22 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ribaf.2020.101253

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