Influence of Macroeconomics Factors and Legal Stability to the Insurance Growth in the ASEAN-5 Countries

Abstract

This paper examines the influence of legal stability and macroeconomics factor to the non-life insurance development. In light of the growing significance of foreign direct investment (FDI) and trade that stimulate insurance sector, and the stress placed on legal stability of the countries, investigating the role of legal stability is crucial to sustain a country's financial development. This study employs a panel data analysis spanning 20 years in the selected developing countries. The findings suggest that higher trade, higher income, higher stock market trading activities and higher availability of finance credit will enhance the non-life insurance development. Legal stability such as enhancement on the property right and government integrity will improve the non-life insurance development. When the legal environments in emerging countries are more stable, the FDI and stocks market will become more encouraging and stimulate non-life insurance development. The policy makers should improve the legal stability in emerging countries to improve the financial development for minimizing the gap with developed countries. This study includes the institutional factors components in addition to the macroeconomics factors could provide a complete picture towards the improvement of non-life insurance development in emerging and transition countries.

Does Economic Freedom in Host Countries Lead to Increased Non-Life Insurance Development?

“…Since the stock market and economic growth tend to converge in the long run, a more capitalized stock market and high economic growth can have a substantial impact on non-life insurance development (Pradhan et al, 2020). The inflation rate acts as a gage of the market risk and is another variable that could influence the stability of insurance development (Lee, Cheng et al, 2018). A rise in inflation could potentially deteriorate the insurance companies' solvency margin, leading them into the insolvency trap.…”

“…The inflation rate affects insurance development because a higher inflation rate exerts a higher market risk that increases market uncertainty which impedes non-life insurance development (Lee, Cheng et al, 2018;Yuan & Jiang, 2020). 1d…”

“…The selection of pooled OLS or the REM is based on the Breusch-Pagan Lagrangian multiplier test where the null hypothesis denotes that the pooled OLS is preferred versus the alternative hypothesis that denotes that the REM is preferred. The choice between the REM and the FEM is based on the Hausman test where the null hypothesis indicates that the REM is preferred as opposed to the FEM (Gujarati & Porter, 2009;Lee, Cheng et al, 2018) The dynamic ordinary least squares (DOLS) model is utilized to get an unbiased estimate of the model's long-term parameters to check robustness.…”

“…A rise in inflation could potentially deteriorate the insurance companies' solvency margin, leading them into the insolvency trap. It implies that inflation has an inverse relationship with the demand for insurance that could impede the growth of the non-life insurance sector (Lee, Cheng et al, 2018;Yuan & Jiang, 2020). Furthermore, Bobovnik (2016) suggests that the higher availability of credit from financial institutions indicates that households are more in debt and that they have a higher probability of encountering risky events that affect their expected future wealth.…”

“…Most of these studies have demonstrated that macroeconomic factors such as trade, interest rate, inflation rate, stock market development and banking development are the drivers of non-life insurance development. Apart from the traditional macroeconomics factors as the determinants of non-life insurance development, the recent literature argue that institutional environment associated with the countries such as economic freedom, culture effect, and legal stability affect the development of non-life insurance (Lee, Cheng et al, 2018;Trinh et al, 2020Trinh et al, , 2021. At the empirical level, the impact of the macroeconomics factors and economic freedom on non-life insurance in the ASEAN and China have not been studied as extensively as the developed countries and European countries.…”