A THEORETICAL AND EMPIRICAL ANALYSIS

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Development economic effects of the insurance
sector in CEE and mature European economies

• A THEORETICAL AND EMPIRICAL ANALYSIS

Kjell Sümegi kjell.suemegi_at_nexusteam.at
Peter R. Haiss peter.haiss_at_wu-wien.ac.at
Vienna University of Economics and Business
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Research Question

• Insurance facilitate Economic Growth?
• equally to Banks Markets
• How?
• Flows of Money and Risks
• Dependencies to perform
• Which kind of Insurance service?
• Life Insurance
• Nonlife Insurance
• Investments
• Is there a difference between EU15 and CEE?

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Short Summary

• Yes, Insurance can help Economy to grow
• Various Channels of Influence
• Life Insurance / Investments important in EU15
• Nonlife important in CEE
• ? so there are differences between EU15 and CEE

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Research Motivation

• Total asset in 200517 Trillion USD 44 of
  household holdings
• Rapid Development of Premiums Investments
• Biggest inst. Investor
• Experience from former Work (CEE ltgt EU15)

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Research Motivation 2

• Research Comments
• Wachtel (2001)
• Favara (2003) see need to examine other
  instruments
• EC (2005) CEA (2006) assume link
• Merton (2004) Tech ? Fin. System ? Growth

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Theoretical Basis

• Imperfect Markets
• Theory of Financial Intermediation
• mobilises saving
• provides risk transfer
• enhances market liquidity
• lowers capital costs via scale
• monitoring
• lowers information asymetry
• today falling information costs ?risk transfer
  scale effects remain

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Risk Transfer

• Savings against Coverage
• ? Reverse ? Premiums? Income ? Premiums
• Mobilise Savings
• create Liquidity(Market Customer)
• smoothen Economic Cycle
• Incentives for Trade, Lending

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Investment

• various Reasons time gap btw. Payment Claim,
  anticip. Returns, track Index (Def. Benefit)
• match Assets Liabilities ?
• broaden Inv. Spectrum
• expand Inv. Horizon
• Volume, Market Depth ?
• Market Efficiency ?

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Additional Aspects

• Market Conditions

• Law Supervision

• Savings Substitution
• Ageing Population
• Switch from DB ? DC Plans in Europe Funded
  schemes
• Cultural Background Fukuyama Hofstede

• Solvency I ? II, IFRS
• prevent Asset/Liability Mismatch
• technical actuarial Risks
• Law-and-Finance View by La Porta and others

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Theoretical Model
Premium
Investment
Information
Yields
Claims
Risks
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Differences btw. EU15 CEE
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Empirical Analysis - Setup

• Growth aka. Economic Development ? GDP growth
• Controll Variables Inflation, Interest Rate
• Insurance Activity

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Empirical Analysis - Methodology

• endogenous Growth Model
• constant returns to scale perfect competition
• modified Cobb-Douglas Production Function
• 1.
• 2.
• K Capital Stock
• H Human Capital
• L Labour Force
• Assumptions INS?, K?, L?, Inflation?, Int. Rate?

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Empirical Analysis - Results

• Panel EU15, Norway, Switzerland, Iceland, NMS,
  Croatia, Turkey 29 Countries
• Timespan1992 2005
• Method GLS on unbalanced Panel

• Control Variables
• Inflation negative and significant
• Interest Ratepositive for EU15, negative for
  CEE
• Important Interest Rate turns results

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Conclusion

• Importance
• rising Premiums Assets
• no adequate Awareness in Research
• Theory
• various Channels of positive Influence Risk
  Transfer, Investment, etc.
• major Issues Regulation, Asset/Liability match,
  Ageing Society, Contagion
• Empirical Result
• mixed Picture, major Differences btw. EU15 CEE
• EU15 Investments CEE Nonlife Business
• Inclusion of Interest Rate important!

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possible Critique

• Premiums as proxy for Insurance services
• Construction of Human Capital IndexRD School
  Level
• Which Difference btw. EU15 CEE is important?
• Test on other country groups Data?
• Econometric Methodology dynamic Panel - GMM