The Effect of Banking Crises: Evidence from Non-life Insurance Consumption

We study the connection between banking crises and non-life insurance consumption in 139 countries from 1988 to 2010. After controlling for output, we find a negative excess decline in non-life insurance consumption after the occurrence of a banking crisis only in countries heavily depending on bank credit. The primary contributing factor is motor insurance which loses 113% of the annual premium in the same post-crisis window. The magnitude of premium loss is 60-70% larger in the high income countries. We interpret this finding in the context of the macroeconomic literature on the real effects of banking crises: Reduced consumption of non-life insurance is consistent with a reduction in risktaking at the societal level that could lead to the persistent post-crisis output effects observed in recent macroeconomic research. We test whether the reduced insurance consumption can be explained by risk-shifting due to the post-crisis contraction of credit and investment. JEL Codes: G01, G22, E22