INSURANCE SECTOR DEVELOPMENT AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

This empirical study investigated the link between insurance sector developments to economic growth of Ethiopia over a period 2000-2014. To achieve objectives of the study, data were collected from the regulatory body, National Bank of Ethiopia, annual statistical bulletins. The data collected were analyzed using relevant econometric model testes OLS, ADF unit root, Pair wise correlation test, Johanson Co-integration, Student t-test and F-test. The result revealed that Non-life Insurance penetration, Life insurance penetration, Gross capital formation and broad money do have a direct short run relationship to Real Gross Domestic Product (RGDP). The result from t-test shows that except Life insurance penetration and Paid up capital, other independent variables are statistically significant to explain economic growth in Ethiopia. Moreover, the overall model is statistically significant as the calculated value of F-statistics is greater than the tabulated value at 5% significance level. This shows that the combined contribution of the independent variables is statistically significant. The Coefficient of Multiple Determination (R2) with a value of 0.95 showed that about 95% variation in the dependent variable was explained by the variation of included explanatory variables while the remaining 5% was explained by the stochastic variables. The result of the ADF unit root test revealed that the parameters were stationary at difference since the ADF statistics is greater than 5% critical value. Moreover, the result form Johanson Co-integration test revealed a long run relationship among the variables as the Trace/Max statistics is greater than 5% critical values. It is recommended that the regulatory body, National Bank of Ethiopia, and the Association of Ethiopian Insurers should build their capacity and work together to pull the sector out of its current infancy level.