role of insurance in economic development
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ROLE OF INSURANCE IN
ECONOMIC DEVELOPMENT
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MEANING
A promise of
compensation for specific potential future
losses in exchange for
a periodic payment
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MEANING
Insurance is designed to protect the financial well-
being of an individual, company or
other entity in the case of
unexpected loss.
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MEANINGSome forms of insurance are required by law, while
others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange
for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum
of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called
the deductible), and the insurer pays the rest..
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Examples
include
car insurance, health insurance, disability insurance, life insurance,
and business insurance
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ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT
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Promote financial stability.
By protecting 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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Substitutes for government security programs
Private insurance can relieve pressure on social insurance system, preserving government resources for essential social security.
Pension fund and life insurance
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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.
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Insurers vs. Other financial intermediaries
Commercial banks :short-term depositsContractual saving institutions :long-term view
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Encourages loss mitigation
If pricing is tied to loss experience, insures have economic incentives to control losses.
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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:
insurers make reasonably accurate estimates as to the pool’s overall losses.
insurers diversify their portfolios
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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.
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A
presentation
Siddharth Nair