Insurance in its simplest
form is familiar to everyone in their personal
lives in the form of car insurance, buildings and contents household insurance
and life insurance. Insurance, in law and economics,
is a form of risk management primarily used to hedge
against the risk
of a contingent loss. Thus, insurance is defined as the equitable transfer of
the risk of a loss, from one entity to another, in exchange for a premium,
and can be thought of as a guaranteed and known small loss to prevent a large,
possibly devastating loss.
Similarly, insurance is a
co-operative device of distributing losses, falling on an individual or his
family over a large number of persons, each bearing a nominal expenditure and
feeling secure against heavy loss. According to this school of thought,
insurance is a social device to accumulate funds to meet the uncertain losses
arising through a certain risk to a person insured against the risk.
How Insurance Functions?
In insurance business, each
person/household (Policy owner) pays a premium to transfer 'catastrophic risks'
to an insurer. The insurer (insurance company) calculates the premiums
according to actuarial techniques using statistical data, in such a way that on
average the insurer makes a profit, even though it will have to pay out some
claims. The principle is based upon the
insurer spreading its risk over many different clients, some of them will
sustain losses and make claims, but most of them will not. In this regard,
insurance has been introduced to safeguard the interest of people from
uncertainty by providing certainty of payment at a given contingency.
For the economic growth of
the country insurance provides a strong platform to protect against loss of
property and system to accumulate adequate capital for investment. A strong and healthy insurance sector is of
utmost importance for all groups and Sectors of the economy.
Health, life and motor third
party liability insurance enable private households to obtain a higher quality
of life by satisfying their desire for security and for a guaranteed income
level. Transport, product liability and property insurance promote entrepreneurial
activities and commerce. Insurances against premature death or disability in
part substitute governmental social spending and safes governmental resources
for other essential social purposes.
Life insurance promotes the
development of capital markets and of the financial sector as a whole by
creating a demand for long-term financial assets. Consequently, insurance
should not be seen as a luxury good, but as a necessary condition for
sustainable economic growth in any country.
Insurance itself has become
a significant economic force in most industrialized countries. Insurance market
activities may contribute to economic growth; both as financial intermediary
and provider of risk transfer and indemnification by allowing different risks
to be managed more efficiently; and by mobilizing domestic savings.
Employees buy insurance to
cover their work related injuries and health problems. Business also insures
their property, including technology used in production, against damage and
theft. Because, it makes business operations safer, insurance encourages
business to make economic transactions, which benefits the economy of
countries.
Insurance companies also perform
a redistribution role. They collect premium and eventually redistribute that
money as payment of the claims. Depending on the type of insurance
redistribution can take anywhere from a few months to many decades. Because of
this delay between collecting and paying out funds, insurance companies invest
their funds to bring extra revenues. Such investments help business and
government to finance their operations and generate profits from those
investments.
Social Value of
Insurance
Insurance has a long and
distinguished history. The UK has played its part in the insurance story, from
as far back as the reaction to the Great Fire of London in 1666 and the
development of insurance trading in Edward Lloyd's coffee shop in 1688. Since
then it has been an essential part of everyday life, playing a crucial role in
both economic development as well as having a role in supporting wider societal
ends.
Though insurance products
are provided in a commercial context, both for individuals and for corporate
customers, they clearly serve a wider social purpose. Insurance helps oil the
engine of the economy, for example in underwriting trade through trade credit.
It also provides peace of mind to the public through collective insurance for a
host of perils including flood, fire, and health. In short, the economy and
society as a whole benefits from the certainty insurance brings through the
following ways:
·
Efficiently protecting the public through innovative risk management
techniques.
·
Freeing up businesses and professionals from everyday risks and
encouraging innovation and competition.
·
Relieving the burden from the state and providing comfort to individuals
by providing safe, effective and affordable pension savings, protection and diversified
products that convert pension savings into retirement income.
Importance of Insurance in Nepal
Insurance benefits society
by allowing individuals to share the risks faced by many people. It also serves
many other important economic and societal functions. Insurance also provides
the capital that the developing countries need to make large volume of
investment to accelerate the overall economic development.
The efficient insurance
markets are an essential for the transition countries like Nepal to achieve
integration into the global economy and sustainable as well as strong economic
growth. In this connection, insurance can play an active role for economic
development of Nepal in the following ways:
·
Risk Transfer Role
One of insurance's key roles
is safeguarding the financial health of small and medium-sized enterprises. In
addition to the protection provided by social security systems, private
insurance cover is crucial for people to insure themselves against inability to
work, set aside money for retirement or protect themselves against the loss of
their assets. This is where insurance comes in as a key component in ensuring
the healthy development of small and medium-sized enterprises - a fact which is
of paramount importance to a country's economic stability.
A vibrant insurance sector
is also important in encouraging domestic production, innovation and trade.
Insurance reduces the investment risk faced by companies and the state. This is
especially important in emerging markets, as a shortage of capital is one of
the major disincentives to investment. By reducing investment risk, insurance
can also encourage companies to think more long-term and increase their risk
tolerance.
·
Information Role
Insurance plays an
additional role in the economy: that of providing information. The level of
insurance premiums provides an indication of existing risks and of how probable
it is that a loss will occur. This helps companies make a comparison of the
risk/return profiles of projects, thereby ensuring that the available resources
are put to the best possible use.
This is highly important in the
country (Nepal) having infrastructure gap and striving for graduating from LDC
status to status of developing country. To infrastructure investments: if it
weren't for insurance, a lot of infrastructure projects - such as power plants,
railways or airports would not have been financially feasible. Insurance
companies also offer consultancy services, advising on how to improve safety
standards and a product's quality.
·
Capital Market Role
As institutional investors,
insurance companies contribute to the development as well as functioning of
capital market. Insurance companies receive premiums and set them aside as
provisions for the payment of future claims. They proceed to invest them in the
capital market, which gives them the status of major investors.
The End Note
From a macro-economic point
of view, the insurance market could help to mobilize national savings and
narrow the investment gap of developing economies. In emerging markets,
domestic savings have not been fully mobilized despite huge funding needs
arising from infrastructure projects. Insurance companies as important
long-term institutional investors, therefore functioning as financial
intermediaries, contribute to bringing together savers and borrowers. Life
insurance, in particular, can make savings available – although life insurers
are themselves dependent on a functioning capital market if they are to measure
up to their role in the area of risk transfer.
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