Does Insurance sector foster economic growth?

In the present day, Insurance sector is the highest paid and highest intake industry in the country...It feeds the maximum households of India.

But now the question is that whether this 'highly talked of' industry is actually helping us to march towards a developed country in 2020?

This paper demonstrates that the insurance industry plays a vital role in this strategy and provides evidence on how insurers contribute to growth and employment in India.

Economists have demonstrated that economic growth and insurance development are interdependent and that a world without insurance would be much less developed and much less stable.

How the insurance sector fosters economic growth?

The insurance industry promotes economic growth and structural development through the following channels: 1. Providing broader insurance coverage directly to firms, improving their financial soundness.

2. Fostering entrepreneurial attitudes, encouraging investment, innovation, market dynamism and competition.

3. Offering social protection alongside the state, releasing pressure on public sector finance.

4. Promoting sensible risk management by households and firms, contributing to sustainable and responsible development.

5. Fostering stable consumption throughout life.

Providing broader insurance coverage directly to firms, improving their financial soundness

Insurance allows firms to expand and take on economic risks without the need to set aside capital in liquid contingency funds. The absence of adequate business insurance cover tends to be particularly harmful for small firms. Limited capital and difficulty in accessing financial markets make them vulnerable to adverse events. Without insurance, large contingency funds would be needed to protect firms against risk. For many small firms this would represent more capital than they presently employ in total. Therefore, without insurance, the population of firms would decrease rapidly. It is difficult to assess the exact extent of the positive effect of business insurance on economic activity. Whereas comparison of insurance premiums to GDP conveys information on the performance of the insurance industry, it overlooks the wider contribution to the economy.

Fostering entrepreneurial attitudes, encouraging investment, innovation, market dynamism, and competition

Being innovative presupposes the willingness to take risks. Since (potential) entrepreneurs, much like ordinary people, are characterized by risk aversion, the willingness to take risks can be considered as a scarce resource. The more willingness to take risk is available, the more will be produced. Even if the insurance industry cannot change the overall willingness of actors in an economy to take risks (risk aversion does not change with insurance), it does play a key role in freeing entrepreneurial spirit.

Insurance decreases the risk supported by entrepreneurs through mitigating and pooling procedures and allows them to take additional risks. Well developed insurance markets contribute by helping to optimize the allocation of the scarce resource of “risk-taking” by shifting it from conservative to innovative and high-profit activities. Underinsured firms, in contrast, usually do not exploit new business opportunities; they invest less in

innovation and their degree in participation in global markets is low. The relationship between insurers and their business customers should be considered at least as important as the relationship between banks and their

business customers.

Offering social protection alongside the state, releasing pressure on public sector finance

In all industrialized countries, the debate about the need to revise the social protection offered by the state is increasing. The population structure is changing fundamentally with a longer life expectancy, an increase in elderly people and a falling birth-rate. At the same time people expect to receive a high level of

healthcare, pensions, unemployment allowance and other social benefit

Promoting sensible risk management by firms and households, contributing to sustainable and responsible development

Insurers’ risk assessment is reflected in price and policy conditions. In this way they offer
firms and households an indicator of their risk level. The policyholder can take action to reduce the risk profile, or to reduce the potential damage, or both. Therefore, by means of risk pricing, insurance acts as a precaution improver and

encourages responsible and sustainable use of resources; for example: prevention of accidents at work, less polluting technology. The client will clearly see the advantages of action taken to reduce risk. In some cases this will happen because there will be no insurance if things are left unchanged, at other times this will happen because of a high premium level. This process influences investment decisions and thus contributes to the sustainable development of the economy and society.

Fostering stable consumption throughout life

Consumption represents almost 80% of GDP and constitutes one of the main drivers of economic growth and citizen welfare. By offering lifelong financial protection, insurance acts as a security net allowing stable consumption throughout an individual’s life:

• House and other damage insurance allow households to secure their assets in case of adverse events (see example on page 10 which works in the same way for households as for firms).

• Liability insurance protects households from the consequence of damage they may cause to other people.

• Life insurance protects relatives from financial burdens in case of death and/or offers revenue, under the form of capital or annuities, at the time of retirement.

• Health and accident insurance provides resources when they are most needed.

• Credit insurance eases consumption but also protects the consumer against excessive debt through pricing and acceptation policies.By offering products relevant to all aspects of life, insurance secures the standard

of living and sustains consumption, which is one of the main drivers of economic growth. Guaranteeing a stable lifestyle to millions of Europeans increases their confidence in the future and enhances consumption.

Summary:

Insurance promotes economic development

• Insurance reduces the capital firms need to operate.

• Insurance fosters investment and innovation by creating an environment of greater certainty.

• Insurers are solid partners for the development of a workable supplementary system of social protection, in particular in the field of retirement and health provision.

• As institutional investors, insurers contribute to the modernisation of financial markets and facilitate firms’ access to capital.

• Insurance promotes sensible risk-management measures through the price mechanism and other methods and contributes to responsible and sustainable economic development.

• Insurance fosters stable consumption throughout the consumer’s life.

Moreover, in a global economy characterised by rapid social and demographic change and by the emergence of new risks (e.g. by climate change or technological developments) and new needs (health care, pensions), cooperation between private insurance and public institutions is essential. This cooperation can bring benefits in many fields, for example, health of the working population, accident prevention, compensation for agricultural risks, international trade (export credit insurance), etc.