Insurance is a financial concept developed to protect individuals and businesses from loss and uncertainty. It primarily sought to eliminate or mitigate the effects of these losses. However, over time, insurance has proven to be of immense importance to people and businesses and the growth of the national economy.
Insurance companies fund long-term infrastructural investments in the United States and help small and medium enterprises (MSMEs) fund business activities. For example, they assist MSMEs in purchasing land, buildings, and equipment.
Insurance companies are quite different from other investors because they often focus on long-term liabilities and investments. Insurance companies in the United States often focus on long-term investments when they invest in policyholder premiums, expecting future claims. Therefore, their interest in long-term investments ensures that they stabilize the capital market. They also make a long-term investments in critical sectors like public education and real estate.
Similarly, insurance plays an essential role in the capital markets. Insurance companies have a substantial amount of share assets in the capital market. These classes of assets range from municipal bonds to corporate bonds. Possession of these assets allows insurance companies to ensure financial liquidity in the economy. Insurance companies in the United States often invest in less traded bonds, giving them a long-term investment advantage.
Further, insurance companies have the most significant investment in quoted shares, debt securities, monetary financial institutions (MFIs), and other financial intermediaries (OFIs). However, insurance companies play a more important role in debt securities than quoted shares. Debt securities are essential to the economy because they guarantee the repayment of principal and interest over loans.
The insurance sector continues to play an important role in credit protection. Most insurers have credit default swaps (CDS). CDS is a financial mechanism that permits investors to swap their credit risk or default with another investor. Among other things, CDS ensures a smooth flow of credit in the economy.
Insurance companies often keep a close eye on the insured objects to maximize their profit. For instance, an insurance company providing fire insurance will ensure that adequate fire safety measures are put in place to protect insured lives and properties. This eventually reduces economic losses that might be sustained due to fire disasters.
Uncertainty is one of the banes of economic productivity. Insurance often helps remove the uncertainties of human life and the uncertainties of doing business. Insurance often provides safety and assurance against any fear of sudden loss. This assurance allows businesses to thrive and employ more workers, contributing to economic growth.
Insurance companies equally collect premiums from individuals and businesses to be insured. The revenues from premiums are then used to invest in government stock and securities. By investing in government stock and securities, insurance companies help the government generate revenue that helps achieve industrial development and create job opportunities, which results in capital formation.
Insurance also drives economic growth by encouraging domestic savings. Most people systematically save their money because they must pay a premium over their insured properties. Therefore, the insured individual or business can access the lump sum when the contract is mature, similarly by transferring the risk of specific business endeavors to the insurer.