The Role of Insurance in Economic Development

Pooja Garg

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.

Peach of mind and financial carelessness

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

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

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

Helps mobilize savings

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

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.

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.

Thank You