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Economic Policy Uncertainty and Insurance

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

No 201776, Working Papers from University of Pretoria, Department of Economics

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. Also, a major limitation of insurance literature is the choice of methodology. Most studies about 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 study investigates the impact of economic policy uncertainty on insurance premium growth, controlling for the effect of real output, in a panel of 19 countries over the period 2003-2016 by employing heterogeneous panel estimation techniques with cross-sectional dependence. CADF and CIPS unit root tests conducted show that each of the variables becomes stationary after first difference. The Westerlund (2007) cointegration test results 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 and real output. Economic policy uncertainty raises insurance premiums in the short run and lessens it in the long run whereas real output increases insurance premiums both in the short and long run, although its long run impact is greater than the short run impact. Also, economic policy uncertainty exerts a bigger influence on non-life insurance premium than on life insurance premium.

Keywords: Economic policy uncertainty; insurance premium; short- and long-run relationships (search for similar items in EconPapers)
JEL-codes: C33 G22 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2017-11
New Economics Papers: this item is included in nep-dcm and nep-ias
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