Insurance Penetration and Interest Rate Nexus in Nigeria; an Autoregressive Distributed Lag Approach

Abstract

This study investigated the effect of interest rate on insurance penetration in Nigeria. Interest rate is a vital monetary instrument that helps in macroeconomic stability through proper mobilization and distribution of capital. It’s adjustment affects both banking industry as well as the non – banking financial institutions such as the insurance industry. For developing countries like Nigeria with social and economic problems, the issue of risk management and insurance services as related to economic stability is relatively determined by the structural arrangement of the insurance sector and such arrangement is relative to the performance of all economic actors and the overall social environment The study used Auto Regressive Distributed Lag (ARDL) bounds test approach. Data was sourced from the central bank of Nigerian statistical bulletin for the period of 1985 to 2019. The result indicated that an increase in interest rate significantly decrease the rate of insurance penetration in both short run and long run. Other control variables used are exchange rate and inflation rate, and the result for this variables indicates that exchange rate has a significant relationship whereas inflation rate has an insignificant relationship with insurance penetration. The result of the co-integrating equation indicates that every movement into disequilibrium is corrected for within one period at a significant rate. The study therefore suggested that prior to any adjustment in the monetary policies or other economic policy, a detailed investigation should be carried out to ensure a favorable compliance of the short run and long run effect of adjusting such on the macroeconomic indices and insurance penetration.