With Yinka Bolarinwa
Theoretical studies and empirical evidence have shown that countries with better-developed financial systems enjoy faster and more stable long-run growth. Well developed financial markets have a significant positive impact on total factor productivity, which translates into higher long-run growth.
According to the finance growth supposition, financial development promotes economic growth through channels of marginal productivity of capital, efficiency of growth through the channels is realized by functions of financial intermediaries.
The functions include the provision of means for clearing and settling payments to facilitate the exchange of goods, services and assets, the provision of a mechanism for pooling resources and the subdivision of shares in various enterprises, resource allocation, risk management, price information to help coordinate decentralized decision making in various sectors of the economy, and the means to deal with the incentive problems created when one party of a financial transaction has the information that the other party does not, or when one party acts as an agent of the other.
The roles of the insurance sector and links into other financial sectors have grown in importance.
While there is a plethora of research on the causal relationship between bank lending and economic growth and capital markets and economic growth, the insurance sector has not received ample attention in this respect. Numerous empirical studies confirm financial intermediation plays a growth-supporting role.
Among financial intermediaries, insurance companies play important role in performing functions of financial system. They are main risk management tools for companies and individuals.
Through issuing insurance policies they collect funds and transfer them to deficit economic units for financing real investment. Therefore, according to the finance-growth theory, insurance sector could be one of the factors contributing to economic growth.
The importance of the insurance-growth nexus is growing due to the increasing share of the insurance sector in the aggregate financial sector in almost every developing and developed country.
Insurance companies, together with mutual and pension funds, are one of the biggest institutional investors into stock, bond and real estate markets and their possible impact on economic development will rather grow than decline due to issues such as ageing societies, widening income disparity and globalisation.
The growing links between the insurance and other financial sectors also emphasize the possible role of insurance companies in economic growth. Cross-shareholdings and bank-assurance as a major form of financial conglomerates and asure finance play a rising role.
Providing protection, insurers could affect economic growth through the channels of marginal productivity of capital, technological innovations and saving rate. Insurance companies indemnify the ones who suffer losses and stabilize the financial position of individuals and firms.
With possibility of transfer of different kinds of risks to insurance companies, risk adverse economic units are more induced to buy goods and services, especially those of higher values.
In this way insurance sustains demand or consumption for goods and services which encourage production and employment and finally, economic growth.