Causal Relation between Life Insurance Funds and Economic Growth: Evidence from Malaysia

The life insurance sector has been growing rapidly in Malaysia with enlarged pooled funds that allowed the sector to participate actively in portfolio investments. It reflects a possible growth impact, which has not gained much attention from the current research. This study aims to examine the existence of a causal relation between the life insurance sector and the growth of the Malaysian economy. This study applies the Johansen cointegration test, and the Granger causality test based on the Vector Error Correction Model (VECM) to demonstrate the possible causal relation. The results provide sufficient evidence to support a long-run relationship between the life insurance indicator (the total assets of Malaysian life insurance sector) and the real GDP, and also a short-run causal relation from the real GDP to the life insurance indicator (the total assets of Malaysian life insurance sector). The findings suggest that the life insurance sector of Malaysia could potentially be an effective financial intermediation to generate long-term savings to finance capital investments and eventually could strengthen the country's economic growth.