Insurance has become an essential tool to manage the risks of an individual and corporations. Insurance is an economic institution that allows the transfer of financial risk from an individual to a group by the means of a two-party contract. Insurance is a legal contract that protects people from financial losses.
In finance, risk management is the practice of identifying potential risks in advance, analyzing them and taking precautionary steps. Human life and properties are always exposed to risk and uncertainties as it may cause great loss to human beings. Nobody is forewarned before a loss occurs from those risk or uncertainties. Risk can’t be totally eliminated or avoided but there is a device put in place to cover the loss of the financial risk, which is known as insurance.
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured. Insurance coverage refers to the legal and financial protection against potential future harm. It protects the risk of the person and the business. Insurance has become an essential tool to manage the risk of individuals and corporations. It is an economic institution that allows the financial risk from an individual to a group by means of a two party contract. It can be said to be a legal contract that protects people from financial losses. It is a contract between the insurer and the insured in which the insurer promises to pay for the financial losses to the insured.
Insurance contributes to the general economic growth of the society. It provides stability to the functioning of the process. The insurance company develop financial institutions and reduce uncertainties by improving financial resources.
The Role of Insurance in an Economy
- Risk Mitigation
The primary way insurance helps economic development is via risk management. Entrepreneurs and business owners can control their exposure via insurance policies, buying protection against crime, damages, liability lawsuits or natural disasters that could otherwise prove catastrophic. Insurance removes that danger from the equation, thus making development more palatable.
- Incentivizing Business Development
Governments can expand the availability of insurance beyond what the private sector would ordinarily offer by offering additional protections against loss.
- Financial Effects
Insurance can help encourage investment by promoting financial stability and mobilizing savings. The concentration of income from customers purchasing life insurance policies, for example, provides capital that can be invested elsewhere in the economy by the company for greater returns. Individuals know that NDIC insurance means their bank deposits are safe, thus encouraging them to place money into financial institutions that can then use their funds to make new loans.
- Safety Net
Personal and social insurance policies also can help economic development by helping workers stay healthy, keeping them afloat between jobs and getting them ready for a more appropriate assignment. With health insurance, for example, workers are encouraged to see doctors, get treatment for injuries or illnesses and avoid the burden that a catastrophic medical emergency might otherwise have on their finances.