Institutional Quality, Knightian Uncertainty, and Insurability: A Cross-Country Analysis
IMF Working Papers, July 1, 2006
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- Institutional Quality, Knightian Uncertainty, and Insurability: A Cross-Country Analysis
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Bibliographic details
- Authors: S. Nuri Erbas, Chera L. Sayers
- Published: July 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864397.001
Summary
- Knightian uncertainty (ambiguity) implies presence of uninsurable risks.
- Institutional quality may be a good indicator of Knightian uncertainty.
- The paper correlates non-life insurance penetration in 70 countries with income level, financial sector depth, country risk, a measure of cost of insurance, and the World Bank governance indexes.
- The institutional quality–transparency–uncertainty nexus is identified as the dominant determinant of insurability across countries, surpassing the explanatory power of income level.
- Insurability is lower when governance is weaker.
Methodology and Scope
- Cross-country empirical analysis covering non-life insurance penetration across 70 countries.
- Explanatory variables: income level, financial sector depth, country risk, a measure of cost of insurance, and the World Bank governance indexes.
Key Findings
- Institutional quality, as it reflects on the level of uncertainty, is the deeper determinant of insurability.
- The institutional quality–transparency–uncertainty nexus dominates income level in explaining cross-country differences in insurability.
- Weaker governance is associated with lower insurability.
Policy Implications
- Strengthening institutional quality and transparency can improve insurability by reducing Knightian uncertainty.
- Reforms aimed at improving governance could have a larger effect on insurance market penetration than measures focused solely on income or financial sector depth.