ROLE OF INSURANCE IN

ECONOMIC DEVELOPMENT

MEANING

A promise of

compensation for specific potential future

losses in exchange for

a periodic payment

MEANING

Insurance is designed to protect the financial well-

being of an individual, company or

other entity in the case of

unexpected loss.

MEANINGSome forms of insurance are required by law, while

others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange

for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum

of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called

the deductible), and the insurer pays the rest..

Examples 

include 

car insurance, health insurance, disability insurance, life insurance,

and business insurance

ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT

Promote financial stability.

By protecting those who suffer or harm, insurance helps stabilize the financial situation of individuals, families and organizations.

It encourages individuals and firms to invest and create wealth.

Substitutes for government security programs

Private insurance can relieve pressure on social insurance system, preserving government resources for essential social security.

Pension fund and life insurance

Facilitates trade and commerce

Many products and services are produced and sold only if adequate liability insurance is available to cover any claims for negligence.

Insurers vs. Other financial intermediaries

Commercial banks :short-term depositsContractual saving institutions :long-term view

Encourages loss mitigation

If pricing is tied to loss experience, insures have economic incentives to control losses.

Enables risk to be managed more efficiently

Risk pricing -greater the expected loss, higher the price

Risk transformation -risk exposures can be transferred to an insurer for a price

Risk pooling and reduction:

insurers make reasonably accurate estimates as to the pool’s overall losses.

insurers diversify their portfolios

Fosters a more efficient capital allocation

Insurers will monitor the companies to reduce risk-increasing behavior and act in the best interests of their various stakeholders.

A watch-dog role.

A

presentation

Siddharth Nair