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The Long-run Effect of Geopolitical Risks on Insurance Premiums

Author

Listed:
  • Godwin Olasehinde-Williams

    (Department of Economics, Eastern Mediterranean University)

  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University)

Abstract

This paper deals with the estimation of the risk-insurance nexus. We specifically examined the effect of geopolitical risk on insurance premium in a panel of 18 countries while controlling for the effect of real income. We did this by employing second generation econometric methods. We found strong evidence of a positive impact of geopolitical risks on insurance premiums. We specifically found that the impact of geopolitical risks on non-life insurance premium is higher than the impact on life insurance premium. Real income was also found to have a significantly positive effect on insurance premiums, and the impact on non-life insurance premium similarly larger than the impact on life insurance premium. On the basis of the income elasticity, we found that insurance has the semblance of a luxury good, and on the basis of the panel causality tests, we confirmed the feedback hypothesis. We therefore conclude that exposure to geopolitical risks raises insurance premiums either as a result of increased insurance demand to hedge against geopolitical uncertainty or as a result of uncertainty tax factored into insurance premiums in unstable environments.

Suggested Citation

  • Godwin Olasehinde-Williams & Mehmet Balcilar, 2018. "The Long-run Effect of Geopolitical Risks on Insurance Premiums," Working Papers 15-44, Eastern Mediterranean University, Department of Economics.
    • Handle: RePEc:emu:wpaper:15-44.pdf
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    File URL: http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-44.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Geopolitical risks; insurance market; panel data; panel bootstrap causality;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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