Importance of Insurance

Insurance matters far beyond the individual policyholder who eventually makes a claim. To the individual, insurance provides genuine peace of mind and financial security — a family is protected against the sudden loss of a breadwinner, and a business owner is protected against a single fire or accident wiping out years of accumulated capital. To business, insurance removes a major source of uncertainty, allowing an entrepreneur to take on productive risk (starting a new venture, carrying stock, sending goods by sea) knowing that an insurable loss will not be financially fatal; in this sense insurance actually encourages, rather than discourages, enterprise and trade.

To the economy as a whole, insurance companies collect large amounts of premium in advance of any claim being paid, and these accumulated funds become an important source of long-term investible capital for infrastructure, industry and government borrowing — much as a commercial bank's deposits become a source of loanable funds, the insurance sector's premium pool becomes a source of long-term investment capital. Insurance also spreads risk so widely across society (through the risk-pooling principle covered earlier in this chapter) that a single localised disaster does not cripple any one region or industry disproportionately. …