Masters Degrees (University of Stellenbosch Business School)

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    Insurance sector development and linkages with the broader financial markets
    (Stellenbosch : Stellenbosch University, 2021-12) Addae-Manu, Richard; Graham, Michael; Stellenbosch University. Faculty of Economic and Management Sciences. University of Stellenbosch Business School.
    ENGLISH SUMMARY: The premise of this thesis is the relatively low insurance penetration rates in Africa and other emerging countries compared to developed regions. To examine and derive evidence-based policies and strategies for the growth of the insurance sector and the financial sector as a whole, the thesis conducts three empirical investigations. The first examines the nature of the linkages and causality patterns between the insurance sector and the financial markets. The focus is on the short and long-run linkages between the insurance sector and the components of the financial sector. The linkages theory of economic growth suggests that linkages within the financial sector contribute to understanding the nature of the sector’s influence on economic growth. Utilising this theory and the panel vector autoregressive (VAR/VECM) modelling framework, the thesis documents significant Granger causal interdependencies between the insurance sector (life and non-life insurance) and the other financial sector components in Africa. The BRICS region is found to be characterised by one-way causality patterns from the insurance sector (life and non-life) to the banking sector and stock markets, and from the bond market to life insurance. The documented evidence implies that the financial sectors with sufficiently strong interactions can generate higher capital output and lead to economic growth. Thus, an upsurge in the financial sector’s linkages can close the gap in demand for capital funding in many economies to spur economic growth. The paper contributes to the literature by examining the two-way causality patterns in emerging markets instead of the one-way relationships predominant in the literature. It also examines all major components of domestic finance to avoid any bias in the findings. The second empirical investigation looks into the critical household characteristics that drive insurance demand. This study provides fresh evidence on non-life insurance consumption patterns in an African country; and tests the structural insurance demand model reported by Eling, Pradhan & Schmit (2014). The analysis of risk and consumption patterns is essential for the development and growth of the insurance sector. Thus, expanding on Lewis’s (1989) theoretical model, the thesis investigates the linkages between household consumers’ characteristics and insurance uptake for both traditional insurance (life and non-life) and micro (funeral) insurance in South Africa using the Finscope survey data that encompasses 5,000 actual consumers. Applying a multivariate probit model, we find evidence suggesting that low-income households and social grant recipients exert positive (negative) and significant influences on microinsurance (traditional insurance) consumption. Segmenting consumers into living standards, the thesis finds that consumers in the high living standards measure (LSM) group show significant positive effects in the traditional insurance market, while the lower LSMs demonstrate a substitutive effect. Further, we note that household remittance inflows have a significant positive effect on all three insurance products (life, non-life, and micro (funeral) insurance). Also, differences in education levels play a crucial role in insurance consumption patterns, with university degree holders, but not high school leavers, bearing positive and significant influences in the traditional life and non-life market. We further note gender differences in insurance consumption with males (females) exerting positive and significant effects on non-life (funeral) insurance. Affordability is a predominant theme in the investigations. We find that the popularity of the microinsurance (funeral) product design can bridge the gap between the traditional and non-traditional market to increase the pool of diverse insured risks and improve affordability. Lastly, the thesis closes the literature gap in examining the effects of external finance, in the form of remittances, on domestic insurance penetration rates. The focus is on examining whether remittance inflows complements or substitutes insurance sector development in emerging economies. The thesis makes use of the augmented and common correlated effects mean group estimators for heterogeneous time series panels to model data spanning the 1990-2016 period. The results indicate that the effect of remittance inflows on life insurance penetration rates is shown to be generally substitutive. It is, however, complementary for the non-life insurance sector. The thesis findings also suggest that foreign direct investments (FDIs) significantly complements life insurance penetration rates in the low and lower-middle-income countries compared to remittances. Emerging markets with ailing insurance markets should, thus, derive insurance policies that take cognisance of the linkages between foreign financial flows (FDI and remittances) and the insurance sector, to grow their markets.