By Yinka Bolarinwa

Theoretical studies and empirical evidence have shown that countries with better-developed financial systems enjoy faster and more stable long term growth. Well developed financial markets have a significant positive impact on total factor productivity, which translates into higher long term growth.

According to the finance growth supposition, financial development promotes economic growth through channels of marginal productivity of capital, efficiency of channeling saving to investment, and technological innovation. Critical for a direct economic growth through the channels is realized by functions of financial intermediaries like insurance, banks, pension administrators, asset managers etc.

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.

Role of financial intermediation

Empirical studies have confirmed financial intermediation plays a growth-supporting role. Among financial intermediaries, insurance companies play an important function in economic growth. They are main risk management tool for individuals and companies particularly when view business enterprise from two main perspective;

i. Enterprises that manage their business risks personally within the enterprise, and ii. Enterprises that transfer their business risks to professional risk managers. Through issuing insurance policies they collect premium and transfer them to economic units for financing real investment. Therefore, according to the finance-growth theory, the 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 economy. 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 the economic development will rather grow than decline.

The growing links between the insurance and other players in the financial sector also emphasize the important role of insurance companies in economic growth.