Chapter 1

Insurance and economic development

Insurance and economic development

Huge amount is collected by insurance sector. These amounts are collected by way of insurance premiums. An insurance company can invest these sums for the development of the country. So a well-developed insurance sector is necessary for the economic development of an emerging economy like India, as it provides long- term funds for physical and social infrastructure, while simultaneously strengthening risk-taking abilities. The investment requirements for India in the future years are well-known and the rapid growth of the insurance sector in the post- liberalization period is seen as a good sign. It can, to some extent, facilitate investment in infrastructure development to help sustain the economic growth of the country. Economic development is the sustained growth of the nation’s economy that may result in a monetary increase for a nation’s citizens. While nations use political and fiscal policies to develop and maintain economic growth, the private business sector may also develop practices or business instruments related to economic development. Insurance is a common Instrument used by individuals and businesses to promote economic development. Insurance represents a promise of future compensation relating to specific losses in exchange for periodic payments.

  1. Investment for economic development: For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people. Particularity from the middle and lower income groups. These savings are channeled into investments for economic growth. The insurance Act has strict provisions to ensure that insurance funds are invested in safe avenues like government bonds, companies with records and so on. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premium of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development would be of similar proportions.

 

  1. Providing capital to infrastructure and other long term investments: On the investment side, due to the long term nature of their liabilities, sizeable reserves, and predictable premiums, life insurance providers can serve an important function as institutional investors providing capital to infrastructure and other long term investments as well as professional oversight to these investments.
  2. Benefit of insurance to business and trade: Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, floods etc., Financiers like banks would collapse if the factory, financed by it, is reduced to ashes by a terrible fire.
  3. Companies are protected from the consequences of the loss: The system of insurance provides a number of benefits to people either directly or indirectly. Both individuals and companies are protected from the consequences of the loss that that may be caused by the accident or unforeseen event.
  4. Encourages the businessmen to invest freely in business enterprises: The insurance helps to remove the fear, worry and anxiety related with the uncertainly happening in business. So it encourages the businessmen to invest freely in business enterprises. Hence the insurance encourages commercial and industrial development in the country which are essential for the growth.
  5. Routes for long-term wealth creation: Since its privatization, the life insurance industry in the country has made rapid strides as a key contributor for economic development of the nation. Investments in core areas are crucial and these investments are generated out of long-term savings of the people, specifically the middle and lower income groups. Life insurance is one of the preferred routes 1or long-term wealth creation and building a safety net for family and dependents. Pension offerings by insurers have found tremendous acceptance by consumers as these enabled them to build a nest egg for their retirement years, especially in India where the social security system is non-existent.
  6. Insurance serves a number of valuable economic functions: Insurance serves a number of valuable economic functions that are largely distinct from other types of financial intermediaries. In order to highlight specifically the unique attributes of insurance, it is worth focusing on those services that are not provided by other financial services providers, excluding for instance the contractual savings features of whole or universal life products. The availability of insurance enables risk averse individuals and entrepreneurs to undertake higher risk. Higher return activities than they would do in the absence of insurance. Promoting higher productivity and growth. On the investment side, due to the long term nature of their liabilities, sizeable reserves, and predictable premiums, life insurance providers can serve an important function as institutional investors providing capital to infrastructure and other long term investments as well as professional oversight to these investments. Of course, these benefits are fully realized only in markets where insurance providers invest a substantial portion of their portfolios domestically.
  7. Insurance Contributes Positively to Economic Growth. The growth of insurance markets makes a positive contribution to economic growth. Life insurance is causally linked to growth only in higher income economies but non life insurance makes a positive contribution in both developing and higher income economies. Some research suggests that the positive contribution of life insurance to growth is primarily through the channel of financial intermediation and long term investments. However, it is important to note that these studies do not address the important contributions to individual and social welfare from risk management.
  8. Strong Complementary between Insurance and Banking. Insurance and banking system appear to play complementary roles in the growth process. Insurance and banking make positive contributions to growth severally. But their individual contributions are greater when both are present. There is also some evidence that the development of insurance markets contributes to the health of securities markets.
  9. Insurance enables risk averse individuals and entrepreneurs to undertake higher risk: The indemnification and risk pooling features of insurance facilitate commercial transactions and the provision of credit by mitigating losses. It helps to measure and manage the non verifiable risk more generally Typically insurance contracts involve small periodic payments in return for protection against uncertain and severe losses. This income smoothing effect helps to avoid excessive and costly bankruptcies and facilitates lending to businesses. Fundamentally, the availability of insurance enables risk averse individuals and entrepreneurs to undertake higher risk, higher return activities than they would do in the absence of insurance, promoting higher productivity and growth.
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