Does Insurance Development Promote Economic Growth? Evidence from India

Abstract

Insurance as a component of financial system, makes economic activities possible, as well as contributes to the growth of the economy’s size, employment, managed assets etc. The current paper examines the relationship between the development of insurance sector and economic growth as well as factors contributing to the growth of insurance sector in India. It studies life insurance density and penetration as well as, non-life insurance density and penetration and links them to GDP growth. Later, demographic factors such as age dependency ratio, urban population growth, life expectancy and adult literate population are checked for explaining insurance density and penetration. Using Granger Causality, cointegration within VECM framework, the study finds long run causality between insurance development and economic growth. Further using ARDL bounds approach, a long run causality between life expectancy and insurance development was found. The study concludes by pointing the role of risk aversion due to life uncertainty in insurance development and importance of insurance development in economic growth, with scope of further research on similar lines by considering the role of insurance and its broader investigations.