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The relationship between insurance and banking sectors: does financial structure matter?

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Abstract

This paper employs panel data of 36 countries over the period from 1980 to 2015 to investigate whether financial structure matters for the linkage between the insurance and banking sectors. Panel co-integration tests find that the significant relationship varies across different financial structures. Specifically, a developed financial system and market-based structure reinforce their long-run linkage. Panel Granger causality tests show that the market-based structure strengthens the insurance–bank nexus for the financially underdeveloped group of countries and that a financially developed system is conducive to realising a short-run dynamic linkage for a bank-based economy. More importantly, the linkages between insurance and banking sectors can be complementary or substitutive, depending on the relative importance of risk transfer and capital allocation in the insurance market. These findings offer useful insights into achieving the two sectors’ co-evolution and further provide some evidence from the market-based and financial services viewpoints.

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Notes

  1. Hannan (1991) proposes a model to derive formally and thereby assess critically the most commonly tested relationship between market structure and various aspects of bank conduct and performance as implied by the structure-conduct-performance paradigm. Differing from this work, our paper examines the effects of financial structure on the insurance–banking long- and short-run relationships.

  2. Most existing works applying traditional panel VAR or VECM models ignore the country-specific time effects in the model. In other words, without taking the country-specific macro shocks into consideration the estimation results may not be reliable.

  3. When measuring insurance premiums for each country, foreign insurance volumes are also included.

  4. According to Swiss Re (2016), life and non-life insurance activities are categorised according to standard EU and OECD conventions, whereas accident and health insurance activities are both counted as part of non-life insurance.

  5. In this paper domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. The banking sector includes monetary authorities and deposit money banks as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur liabilities such as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.

  6. For more details on the construction procedure of financial structure see Demirgüç-Kunt and Levine (2001) and the classification of countries shown in Table 1. Note that foreign stocks listed are also included in the respective measures of stock market capitalisation and trading volumes.

  7. From the perspective of economic growth, previous literature discusses the relative merits of bank-based versus market-based financial systems. In this paper we obtain the conclusion from the viewpoint of the relationship between insurance activities and banking credit.

  8. The estimation results for the co-integration relationship and Granger causality in the different groups before and after 2008 are not provided herein.

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Acknowledgements

The authors are grateful to the editor and the two anonymous referees for helpful comments and suggestions.

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Authors and Affiliations

  1. School of Public Economics & Administration, Shanghai University of Finance & Economics, Shanghai, People’s Republic of China

    Guan-Chun Liu

  2. School of Economics and Management, Fuzhou University, Fuzhou, People’s Republic of China

    Chien-Chiang Lee

  3. Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan

    Chien-Chiang Lee

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Liu, GC., Lee, CC. The relationship between insurance and banking sectors: does financial structure matter?. Geneva Pap Risk Insur Issues Pract 44, 569–594 (2019). https://doi.org/10.1057/s41288-019-00135-9

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