The insurance industry has been supporting economic growth by helping individuals and businesses to manage their risk in a more efficient manner. In order for sustainable economic growth to take place, an insurance industry is a must, which focuses on risk financing and management. However, in terms of growth, the insurance industry is not up to par with the economy since but officials in the industry are working on reversing this trend to play an even more important part in the economic growth on a global scale.
In terms of countries and regions, differences are found worldwide. In 2012, Japan, Brazil and North America reported to have experienced a growth in their real insurance premiums in excess of their GDP growth. Other economies on the other hand for example those of the United Kingdom, China, Spain, Germany, France, India and North America reported to have an increase in their premium growth, which was much less than their gross domestic product growth.
Overall, global insurance penetrations are seen to be on the downfall going as low as 6.5 percent in the year 2012.
When an economy has a diverse and efficient financial system which has the ability to finance risk, the economy is able to achieve economic growth. This is because the insurance industry then has the job of managing, diversifying and absorbing the risks of the individuals and companies. In order for economic growth to be sustainable, risk management companies, policymakers and other financial professionals need to understand the relevance of the insurance industry.
Various research conducted has shown that the insurance industry and the services it provides contributes towards economic development through the promotion of financial stability for firms as well as households. They provide services including the support of trade and commerce, social programs, entrepreneurial activity, accumulation of new capital and the efficient allocation of resources. Thus through core economic functions of risk management, risk transfer and the formation of capital, the insurance industry enhances the welfare of a country and helps in the promotion of its economic activity as well as supports the growth of its middle class.
With the insurance industry introducing concepts such as risk pooling and helps reduce the impact of losses for firms and households, the amount of funds need in order to cover losses individually gets reduced, which thus encourages additional output, competition, investments and innovation. It should also be noted that insurance companies generally tend to have the capacity to contribute towards long term finance and effective risk management. It can thus improve the efficiency of segments such as the bonds market and banking as well by using property insurance to increase the value of collateral.
The insurance industry is relevant to the world economy as well as developed economies. This is because in an industrialized country, those involved in insurance are focused more on predictive analysis to improve pricing and risk selection, using technological platforms to achieve operational efficiencies in newer markets, to drive capital efficiencies and to bring about innovative products to get rid of any emerging risk.
In countries where the economy is still emerging and the prominence of the insurance industry is still low, lack of consumer awareness and trust tends to be a big obstacle. In order to improve upon this factor, financial education is of utmost importance with particular efforts being required from both the public and the private sectors.
In order for emerging markets to fully make use of the potential of the insurance industry, affordable products are required which focus on the needs of those who are underserved and which put into place motivations for risk mitigation behavior change. Insurers can then tailor products according to the requirements of the underserved by simplifying terms of their policies and collecting payments in a highly scalable manner. In order for societies in emerging countries to gain from the benefits which insurance has to offer, emerging markets in economies which are still underdeveloped should come up with regulatory environments that address the needs which would help in supporting micro-insurance. Another possibility is that of the industry turning towards a more collaborative innovation in which participants could work together to create a market in which competition exists where fair prices evolve, consumers are provided with choice and social and financial metrics are transparent.
Throughout the world, business, political and social leaders are of the view that some advanced economies are still in a need for recovery whereas emerging economies are still experiencing slower growth. This is where the insurance industry can play its role. By helping individuals and companies to manage risk in a more efficient manner, the insurance industry can be in a position of strength to support economic growth and thereby help countries to increase their GDP. It is the job of the insurance industry leaders and professionals to examine the contributions of the industry towards the economy as well as towards the global economy and should continue to enhance options for alternative risk financing and to constantly identify areas for the purpose of innovation and improvement in order to help promote sustainable growth throughout the world.
Thus in conclusion, it must be noted that while the insurance industry is certainly one which is important for the growth and further development of economies, the industry must be put to right use in order to gain from its benefits. By providing financial stability for consumers and businesses and being able to provide a financial system having the ability to finance risk is definitely what is needed for the growth of any economy. While the practice of insurance is higher in comparison to economies that are still developing, financial education is the key to bring forth this understanding and to make people aware of its importance. Furthermore, it is also the role of key financial player and government to bring forth policies to incorporate such an industry in their economy.