The Long-run Effect of Geopolitical Risks on Insurance Premiums

Godwin Olasehinde-Williams and Mehmet Balcilar
Authors registered in the RePEc Author Service: Muhammad Shahbaz

No 15-44, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: This paper deals with the estimation of the risk-insurance nexus. We specifically examined the effect of geopolitical risk on insurance premium in a panel of 18 countries while controlling for the effect of real income. We did this by employing second generation econometric methods. We found strong evidence of a positive impact of geopolitical risks on insurance premiums. We specifically found that the impact of geopolitical risks on non-life insurance premium is higher than the impact on life insurance premium. Real income was also found to have a significantly positive effect on insurance premiums, and the impact on non-life insurance premium similarly larger than the impact on life insurance premium. On the basis of the income elasticity, we found that insurance has the semblance of a luxury good, and on the basis of the panel causality tests, we confirmed the feedback hypothesis. We therefore conclude that exposure to geopolitical risks raises insurance premiums either as a result of increased insurance demand to hedge against geopolitical uncertainty or as a result of uncertainty tax factored into insurance premiums in unstable environments.

Keywords: Geopolitical risks; insurance market; panel data; panel bootstrap causality (search for similar items in EconPapers)
JEL-codes: C33 G22 G32 O16 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2018
New Economics Papers: this item is included in nep-ias
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-44.pdf First version, 2018 (application/pdf)

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