The effect of geopolitical risks on insurance premiums

Abstract

This article 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. Second‐generation econometric methods were employed for this purpose, and the results provided strong evidence of a positive impact on insurance premiums by geopolitical risks. We specifically found that the impact of geopolitical risks on nonlife 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 nonlife insurance premium was similarly larger than the impact on life insurance premium. On the basis of 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.