The Role of Insurance in

Economic Development
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.