Factors affecting financial development with an emphasis on life insurance: A comparative study of Iran and developed countries

Financial development resulted from the advances in the insurance, banking and capital markets sectors is one of the most important requirements for a country’s sustained economic growth. An efficient system is needed for pooling micro-funds in the banking and insurance sectors and converting them into financial resources for firms’ financing and investment. In developed countries, life insurance is one of the most important mechanisms for attracting stagnant liquidity in the market and leading them into capital market along with sustaining the benefits for policyholders. However, in developing countries, the role of this financial institution is very limited. The objective of this study is to identify and investigate the macroeconomic factors affecting financial development with an emphasis on life insurance development.

This study examined the impact of life insurance on financial development in a comparative study between developed countries and Iran during the period of 1985-2016 using the Generalized method of moments approach.

The results show that the development of life insurance in developed countries, unlike Iran, has a significant impact on financial development. This indicates the underdevelopment of the life insurance sector in Iran's insurance industry. Also, the effect of government expenditure on financial development in Iran, in contrast to the developed countries, is positive and significant. On the other hand, the impact of the inflation rate on financial development in Iran has been significant in contrast to the developed countries. Among the variables studied for developed countries, trade volume, government spending, GDP per capita and life insurance development had the greatest impact on financial development. In Iran, government spending, inflation, and life insurance have had the greatest impact on financial development.

The impact of life insurance on financial development is more than nonlife insurance. Besides, unlike the developed countries, life insurance in Iran due to its low share in the insurance companies’ portfolio, has a significant negative effect on financial development in the banking sector. The first hypothesis of the research "life insurance development has a significant impact on the financial development in the developed countries" is confirmed. Nevertheless, the second hypothesis of the research, "life insurance Development has a significant impact on Iran’s financial development", is partially supported