The Role of Insurance in Economic Development

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Contribution of Insurance to growth Positive contribution towards economic growth Strong complementary between insurance and

banking THE CONCEPT OF MICROINSURANCE Household insurance, Crop insurance, Health

insurance, SME insurance THE RELATION OF PER CAPITA INCOME

AND INSURANCE

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Role of Insurance in Economic Development Promote financial stability

By indemnifying 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

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Role of Insurance in Economic Development Substitutes for and complements

government security programs Private insurance can relieve pressure

on social insurance system, preserving government resources for essential social security.

Pension fund and life insurance Natural disaster indemnity plan

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Role of Insurance in Economic Development 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.

Innovation Credit enhancement

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Role of Insurance in Economic Development Helps mobilize savings

Insurance and financial intermediation Insurance enhance financial system

efficiency in three ways Reduce transaction costs associated with

bringing together savers and borrowers Create liquidity Facilitate economies of scale in investment

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Role of Insurance in Economic Development

Financial intermediaries vs. financial markets

The more developed a country’s financial system, the greater the reliance on markets and the less the reliance on intermediaries.

Insurers vs. other financial intermediaries Commercial banks – short-term deposits Contractual saving institutions – long-term view

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Role of Insurance in Economic Development 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 (1) insurers make reasonably accurate estimates as

to the pool’s overall losses. (2) insurers diversify their portfolios.

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Role of Insurance in Economic Development Encourages loss mitigation

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

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.