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The central role of the insurance sector has long been recognized by the real sector through its budget allocations and by policy setters through regulatory, tax and legal settings. Insurance facilitates trade, makes economic activity more efficient through its role in enterprise risk management, supports financial sector deepening and development, underpins long-term investment and innovation, and helps to improve access to mainstream financial markets for individuals and enterprises. It also addresses poverty by protecting the poor against vulnerability, livelihood risks and catastrophic losses. The poor in turn are able to adopt riskier strategies to increase income and consumption, and accumulate assets.
However, while a few seminal theoretical papers have been produced, there has until recently been little detailed work on transmission mechanisms, or empirical research exploring the socio-economic impacts of the insurance sector. This is now changing rapidly and a growing literature demonstrates that the insurance function, through a range of pre and post loss impacts, plays a critical role in supporting and sustaining inclusive economic growth.
Through a literature review of the relevant research about this topic a recent paper by Rodney Lester* demonstrates that the insurance sector contributes at a basic level to inclusive economic growth and the effectiveness of the credit function. It also shows that the latter impact may be particularly fundamental in assisting the poor to avoid poverty traps and to progress economically.
Most rigorous empirical work on the role of the insurance sector in supporting economic growth has been published only in the last decade and a half. Even more recently, useful empirical work has been carried out on the poverty reduction role of the rapidly growing microinsurance sector. This increasingly has employed rigorous performance measurement methodologies at the individual program level. The research presented demonstrates that microinsurance can have positive effects on health utilization, income maximizing investment strategies for poor farmers (including the use of credit) and the elimination of certain types of poverty trap. The literature also highlights a number of challenges including scaling up microinsurance pilots, enhancing value and efficiency in delivery, applying new technologies, avoiding disproportionate regulation that creates barriers to inclusion, and improving health outcomes by better integrating health delivery systems.
Empirical research on the fiscal and growth impacts of natural disasters and the key roles insurance and risk securitization can play is also now beginning to emerge. The papers reviewed focus on the direct and indirect costs of natural disasters and the cost and appropriate use of ex ante and ex post risk management mechanisms, both in the broader sovereign risk management space and at the household level.
In conclusion, while the policy settings that support the development of the insurance sector are now reasonably well understood, more work needs to be done on understanding transmission mechanisms in order to better focus developmental efforts. In this regard the review has highlighted a potential nexus between credits and insurance that requires further investigation, as the two in tandem appear to be more potent than when developed separately. Finally, insurance is an essential element in the suite of funding mechanisms required to deal with rapid onset natural disasters and offers major opportunities for the development organizations to add value for their partner countries.
This article corresponds to the executive summary of Insurance and Inclusive Growth. World Bank Policy Research Working Paper. June 2014.
*Rodney Lester, Expert Consultant, for the Global Capital Markets and Non-Bank Financial Institutions Group, Financial and Private Sector Development Vice Presidency at the World Bank.