Page 49 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes 14. The concept of chance of loss refers to a ………………………..
15. ………………………………. hazard is responsible for the increased severity of the loss.

3.6 Role of Insurance in Economic Development

You need to know that from its early inception as predominantly a maritime instrument until
the present day, insurance has grown significantly in scope, purpose, and availability. Today the
insurance industry contributes to economic growth and national prosperity in various ways.
At the macro level, the industry helps strengthen the efficiency and resilience of the economy by
facilitating the transfer of risk. At the micro level, it brings benefits in all areas of day-to-day
life. Insurance helps individuals minimise the financial impact of unexpected and unwelcome
future events, and help them organise their businesses and their lives with greater certainty.
Risk-averse individuals are able to enjoy greater utility from their most important assets via the
purchase of insurance products. Almost every conceivable asset or activity can be insured through
familiar product types, such as motor, travel, and home content insurance, and by business
through professional and product liability insurance, cover for business interruption, and many
other contingencies.
As a vital tool for the management of risk by both individuals and organizations, whether
private or public, insurance plays an important role in the economic, social, and political life of
all countries. Quantifying the contribution of insurance to economic growth is, however, far
from simple.

Did u know? One such attempt was made in 1990 by J. Francois Outreville, who investigated
the economic significance of insurance in developing countries. By comparing 45 developed
and developing countries, he was able to show that there is a positive but non-linear
relationship between insurance premiums per capita and gross domestic product per
capita, demonstrating that the development of insurance as a financial instrument clearly
plays an important role in assisting a nation’s economic growth.
An example of how insurance supports economic growth can be demonstrated by its impact on
the private residential homes market. Without home insurance (i.e., structure and contents
insurance), households would be unwilling to invest most of their wealth in a single property
and would have to rent properties from commercial landlords. Hence, insurance enables members
of the general public to be homeowners and supports the private housing market. It could even
be argued, in fact, that insurance directly influenced the growth of democracy in the United
Kingdom, since the vote was initially limited to homeowners.
Another illustration of how insurance supports risk taking and economic growth is that of the
North Sea oil industry from the 1970s. The oil drilling platforms required to operate in the
North Sea were not only extremely expensive to construct, but also had to work at depths and
contend with conditions not previously experienced in the industry. The financial capacity of
the London insurance market, and moreover its willingness to insure new and costly technologies,
supported the successful development of the North Sea oil industry and the subsequent economic
growth of several northern European countries.

The insurance industry also provides mechanisms that enable individuals to pool their savings
to meet financial objectives, such as providing for retirement. Individuals benefit from economies
of scale in accessing capital markets, reducing transaction and information costs, thereby
improving the trade-off they face between risk and expected return. As a result, insurance
companies are a key link in the investment chain that enables firms to finance investment and
savers to smooth income over their lifetimes.

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