The_vision
Member
- Feb 9, 2022
- 13
- 63
Massive benefits of insurance provision to the society
Reduced variability in consumption and reduced ex ante uncertainty through insurance are benefits in themselves, but demand for insurance may be increased by certain additional benefits (Liedtke, 2007). The risk transfer function could encourage innovation, entrepreneurial activity and risk taking. Therefore, an effective transfer of risks could foster
Credit insurance could have other cyclical effects: insofar as premiums reflect current default rates, they will fall during upswings (supporting a credit boom) and rise during downswings (intensifying any credit crunch).
The desirable balance between state and private provision of such insurance is subject to on-going debate, as is the question of what insurance should be mandatory. Economic performance since 2009 and demographic trends have weakened the ability of the public sector to provide such protection, but the accompanying low interest rates have strained long-term insurance plans.
An insurance product could be delivered by a company that bears another name, as when a pension fund offers annuities with guarantees and life risk-related features.
additional long-term investment and output. The following are some of the specific claims made for the benefits of being insured, for different classes of policy holders:
Insurance contributes to the availability of financing to enterprises and households. Providers of financing, be they banks or purchasers of bonds and equity, specialise in the assessment of commercial and financial risks, although they know little about how to quantify and offset other risks such as property and casualty risk, or product liability risk. It is more efficient to have specialists in these areas, i.e. IUs, take on these risks, and also deal with any attendant moral hazard or adverse selection issues. Thus, homeowner insurance is normally a precondition for obtaining a mortgage. A bank making a car loan will require that it be insured, so as to protect itself against exogenous
loss of capital and possible fraud on the part of the borrower. Crop insurance, or at least weather insurance, is often needed before a farmer can obtain financing.
Insurance encourages innovation and longer-term planning. A risk-averse entrepreneur may be more prepared to develop an unproven technology when not subject to major exogenous insurable risks. Moreover, an entrepreneur, or someone investing in human capital, can be more patient with regard to prospective returns when protected against exogenous shocks: taking out insurance reduces the likelihood that the investment will
have to be abandoned early due to an exogenous shock, and therefore the effective discount rate is reduced.
Insurance reduces the need for expensive loan workout and bankruptcy procedures
(Brainard, 2013). Dealing with default can be very time consuming and value destroying.
An insured company will not be forced into bankruptcy when it suffers large exogenous
damages. Therefore, there is a net benefit, which will be in some way shared between
the borrower, the financer, and the insurer.
Achieving these benefits requires the policy-holder to have an insurable interest, i.e. that the protection is afforded to the agent who bears the risk. The effects therefore depend on the maintenance of true insurance for the agents involved; tradable, market-based protection or self-insurance would be, at best, poor substitutes.
Of these benefits, the role of insurance in facilitating credit availability is probably the most time critical in the sense that an agent without availability of insurance cannot make use of
other important financial services and may be liquidity-constrained. The other benefits are
likely to be of importance mainly in the medium to long run.
There may be macroeconomic spill-overs when insurance covers aggregate risks that are large relative to the (domestic) economy8
. Insurance that provides compensation in the case
of a large adverse shock, such as a natural catastrophe, helps stabilise demand, finance
reconstruction, and reduce pressure on the budget (Grant, 2012). To do so, the IUs must be
able to draw on resources from outside the affected area, so they will help finance the current
account deficit that typically follows a catastrophe (Peter, Dahlen, and Saxena, 2012). Few
European countries are subject to shocks that are both insurable and large enough to have a
major macroeconomic impact
Reduced variability in consumption and reduced ex ante uncertainty through insurance are benefits in themselves, but demand for insurance may be increased by certain additional benefits (Liedtke, 2007). The risk transfer function could encourage innovation, entrepreneurial activity and risk taking. Therefore, an effective transfer of risks could fosterCredit insurance could have other cyclical effects: insofar as premiums reflect current default rates, they will fall during upswings (supporting a credit boom) and rise during downswings (intensifying any credit crunch).The desirable balance between state and private provision of such insurance is subject to on-going debate, as is the question of what insurance should be mandatory. Economic performance since 2009 and demographic trends have weakened the ability of the public sector to provide such protection, but the accompanying low interest rates have strained long-term insurance plans.An insurance product could be delivered by a company that bears another name, as when a pension fund offers annuities with guarantees and life risk-related features.additional long-term investment and output. The following are some of the specific claims made for the benefits of being insured, for different classes of policy holders:
Insurance contributes to the availability of financing to enterprises and households. Providers of financing, be they banks or purchasers of bonds and equity, specialise in the assessment of commercial and financial risks, although they know little about how to quantify and offset other risks such as property and casualty risk, or product liability risk. It is more efficient to have specialists in these areas, i.e. IUs, take on these risks, and also deal with any attendant moral hazard or adverse selection issues. Thus, homeowner insurance is normally a precondition for obtaining a mortgage. A bank making a car loan will require that it be insured, so as to protect itself against exogenousloss of capital and possible fraud on the part of the borrower. Crop insurance, or at least weather insurance, is often needed before a farmer can obtain financing.
Insurance encourages innovation and longer-term planning. A risk-averse entrepreneur may be more prepared to develop an unproven technology when not subject to major exogenous insurable risks. Moreover, an entrepreneur, or someone investing in human capital, can be more patient with regard to prospective returns when protected against exogenous shocks: taking out insurance reduces the likelihood that the investment willhave to be abandoned early due to an exogenous shock, and therefore the effective discount rate is reduced.
Insurance reduces the need for expensive loan workout and bankruptcy procedures(Brainard, 2013). Dealing with default can be very time consuming and value destroying.
An insured company will not be forced into bankruptcy when it suffers large exogenous
damages. Therefore, there is a net benefit, which will be in some way shared between
the borrower, the financer, and the insurer.
Achieving these benefits requires the policy-holder to have an insurable interest, i.e. that the protection is afforded to the agent who bears the risk. The effects therefore depend on the maintenance of true insurance for the agents involved; tradable, market-based protection or self-insurance would be, at best, poor substitutes.Of these benefits, the role of insurance in facilitating credit availability is probably the most time critical in the sense that an agent without availability of insurance cannot make use ofother important financial services and may be liquidity-constrained. The other benefits are
likely to be of importance mainly in the medium to long run.
There may be macroeconomic spill-overs when insurance covers aggregate risks that are large relative to the (domestic) economy8. Insurance that provides compensation in the case
of a large adverse shock, such as a natural catastrophe, helps stabilise demand, finance
reconstruction, and reduce pressure on the budget (Grant, 2012). To do so, the IUs must be
able to draw on resources from outside the affected area, so they will help finance the current
account deficit that typically follows a catastrophe (Peter, Dahlen, and Saxena, 2012). Few
European countries are subject to shocks that are both insurable and large enough to have a
major macroeconomic impact
