Insurance development and the finance-growth nexus: Evidence from 34 OECD countries

• We utilize data relating to 34 OECD countries between 1988 and 2012.
• We use a number of variables to characterize insurance market development (IMD).
• We examine the link across IMD, economic growth (GDP), and financial development (FID).
• We show there is a long-run equilibrium relationship between IMD, GDP, and FID.
• IMD and FID appear to be long-run causative factors for GDP.

This paper examines causal relationships between insurance market development, financial development, and economic growth in 34 OECD countries for the period 1988–2012. Insurance market development is defined in terms of life, non-life, and total insurance pervasiveness, both by density and penetration. Financial development is a composite index constructed from eight financial development indicators relating to banking and stock markets. We use a panel vector auto-regression model to reveal the nature of Granger causality among the variables. Our results reveal that insurance market development specifically and financial market development overall seem both to be long-run causative factors of economic growth. On the other hand, our short-run causality results show a diverse pattern of short-run adjustment dynamics between the variables, including the possibility of feedback between them in several instances.