Before we can understand the relevance of insurance companies on the economy, we must first understand the purpose of insurance and how it works. Insurance is a financial tool that is used to spread risk. Insurance is comprised of two main components which is the general insurance and life insurance. Falling under the general insurance category are things that are not alive, but have a significant amount of value, such as, cargo, property and automobile accidents. However, life insurance mainly covers death and medical treatment for a person.
The basis of insurance is to help people during their financial distress. As we know, money can never replace lives, but it can help the lives of the people who we leave behind. Insurance gives people the financial security that is necessary for their family to survive. Personally as an individual, life insurance is the most important for the breadwinner of the family, primarily because there are a few lives that depend on them, what would happen to those lives if something happened to the breadwinner.
Having insurance does not make a person richer or poorer than he already is. Given the fact that insurance can only be claimed in the event of the loss of the insured item or life, having a high amount of coverage is still not worthy to the life or item lost. But what it does is, given the circumstances, under a calamity or an unforeseen event, insurance companies would compensate for the item or life that is loss to the surviving party or rightful owner.
By having such a powerful financial tool at an individual’s disposal, a person could manage his assets and expenditure in a way that allows them to protect what is most important to them without jeopardizing their future growth. As we know, the economy of a country depends on the individuals that comprise in the country such as their spending and saving behavior.
Insurance companies thrives on new businesses to keep their company growing. Having new businesses or insuring more lives means that the company’s funds would grow to a substantial amount. Though all companies operate in such manner, this is more important for insurance companies because they derive coverage payouts from their funds. Therefore, the bigger the funds, the more likely they are going to survive in their industry.
For a certain amount of premium paid each year, the insurance company is going to cover the insured up to a certain amount. This premium calculation is done by the company’s actuaries. Each company has a different calculation for the premiums that are to be paid to the company to bear the risk. Actuaries are required to calculate what are the risk borne by the insurance company for covering such a person or an item. The higher the risk, the more amount of premiums that has to be paid to the insurance company.
With the premiums paid by the insured, insurance companies would invest the money from their funds to grow their funds in a way that would secure their company from going into bankruptcy from insurance claims. These investments made by insurance companies will be carefully placed into the equities market or commodities market to allow them to get a handsome return.
From here we can see that insurance companies do two important things to the economy, one is to ensure a person or an item to allow them to have the financial freedom to pursuit the important thing in their life knowing that their family’s future is still safe. This in turn, will boost the country’s economy with trade because of the financial net that is supported by the insurance companies. Secondly, insurance companies invest in businesses and markets to generate the economy and to keep it growing.
With this, it is safe to assume that the insurance industry is one of the most important pillars of the economy by giving it a strong financial net against unforeseen threats. Insurance companies have provided us with a financial tool that could help us manage what is most important to us in a way that even when we are no longer around, they would still carry on as our living legacy.