Does economic policy uncertainty matter for insurance development? Evidence from 16 OECD countries
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Does economic policy uncertainty matter for insurance development? Evidence from 16 OECD countries Nguyen Phuc Canh1 · Udomsak Wongchoti2 · Su Dinh Thanh3 Received: 28 June 2019 / Accepted: 31 August 2020 © The Geneva Association 2020
Abstract We examine the influence of economic policy uncertainty (EPU) on the liveliness of local insurance markets across 16 OECD countries during the 1998–2017 period. Our static panel data estimations suggest that global policy uncertainty is negatively associated with the life insurance development of a country, as measured by national life insurance penetration (gross insurance premium per GDP in %). Meanwhile, such uncertainty does not significantly affect non-life insurance development in our sample. Furthermore, the analysis shows that the impacts of global EPU on life insurance markets are particularly stronger in periods of increasing EPU. Keywords Economic policy uncertainty · Life insurance · Non-life insurance · Insurance development · OECD
Introduction Not knowing the government’s next move is one of the most critical systematic uncertainties faced by investors in the financial market. According to Steven J. Davis,1 government-related policy uncertainty influences people’s decisions, and 1 Professor of International Business and Economics at Booth School of Business, University of Chicago, one of three researchers who created the EPU index.
* Nguyen Phuc Canh [email protected] Udomsak Wongchoti [email protected] Su Dinh Thanh [email protected] 1
School of Banking, University of Economics Ho Chi Minh City, 59C Nguyen Dinh Chieu, District 3, Ho Chi Minh City 700000, Vietnam
2
School of Economics and Finance, Massey University, Palmerston North, New Zealand
3
School of Public Finance, University of Economics Ho Chi Minh City, Ho Chi Minh City 700000, Vietnam
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thus the economy as a whole. As an example, such uncertainty may lead doubtful economic agents to suspend or reduce their activities in hiring, spending and investing. While the importance of policy uncertainty had largely been acknowledged by scholars, it was not until 2016 that Baker et al. formally published about a proxy for ‘business people’s and households’ concerns about government policy-related uncertainty’—the so-called economic policy uncertainty (EPU) index—in The Quarterly Journal of Economics (Nguyen et al. 2020b). The U.S. EPU index, for example, is created based on the frequency of articles surrounding uncertainty about economic policy—decisions or indecision by the government as seen in 10 major American newspapers in a given period. Baker et al. (2016) showed that their U.S. EPU index actually surged during majorly uncertain times, such as tight presidential elections, the 9/11 attacks and other major battles over fiscal policy. Increases in such uncertainty also precede reductions in investment, output and employment. As a popular proxy for macro uncertainty (and sentiment), the impact of EPU on various aspects of financial market
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