The Broader Economic Importance of Insurance

The broader economic importance of insurance Insurance services have the potential to make a significant impact on the productivity of the economy. For example, providing risk transfer and compensation services helps risk-averse people buy big-ticket items like cars and real estate. Therefore, insurance has positive external effects in terms of increased purchases, profits and employment. In addition, insurance facilitates innovation in the economy by providing insurance against new risks. For example, without access to product liability insurance, companies, especially those in the pharmaceutical sector, will be reluctant to develop and market highly profitable products. Other positive externalities that can arise from insurance lie in its ability to reduce risks in the economy. This matters because risk-takers, such as smokers, nuclear manufacturers, and dangerous car drivers, endanger productive physical and human capital through their behavior. Surname. However, the more an individual puts his or her accumulated capital at risk, the higher the insurance cost. But more importantly, as insurance prices increase, individuals become increasingly motivated to change their behavior. This brings beneficial effects to the accumulated productive capital in the economy. Additional benefits of the insurance industry arise from its activity as a financial intermediary and therefore the development of the insurance market is important for generating capital accumulation in the economy. international. It should be noted that according to Pagano (1993), the process of capital accumulation becomes more efficient when the development of the financial intermediation function is improved. This view can be illustrated first of all by the recognition that increased competition among intermediaries will improve production efficiency. However, the data provided by Cummins et al. (1999) and Hardwick (1997) for life insurance companies in the United States and the United Kingdom show that production inefficiencies are both high and persistent. persist. Second, improving financial intermediary services helps investors access a diverse investment portfolio, encouraging them to invest in high-risk but high-return projects. Furthermore, financial market liquidity is enhanced through financial intermediation, which will limit the waste of economic resources caused by converting assets held by stakeholders too early. . Thus, according to the research of Levine and Zervos (1996); Levine and Démétriades (1997); and Levine and Zervos (1998) liquidity promotes economic growth by facilitating capital flows into capital accumulation projects. Finally, insurance companies, as institutional investors in companies, not only facilitate capital allocation but also improve investment efficiency thanks to their level of oversight . intimacy increases. Therefore, as explained by Conyon and Leech (1994), institutional investors can increase the productive potential of the projects they choose to finance. However, it is important to defuse these arguments by addressing the existence and role of regulation in protecting the interests of policyholders. Unfortunately, it is difficult to determine the place and goals of regulation in the nexus between insurance and economic growth. Because, as Angerer (1993) explains, regulation facilitates the provision of insurance services while simultaneously constraining the activities of insurance companies. Thus, as Dickenson (1993) noted, although regulation may promote greater confidence in the insurance industry's financial structure, it may constrain the industry's investment activities, thereby causing harms efficient capital allocation. Furthermore, as argued by Brewer et al. (1997), regulation of insurance companies, especially through the use of guaranty funds, may encourage insurers to take excessive risks. As a result, the form of regulation used in each country is likely to influence the bankruptcy rate of that country's insurance companies; has a significant impact on consumer confidence and therefore on the use of insurance as a risk management technique. Additional ambiguities may also occur