The Benefits of Insurance System

What advantages does society gain from an insurance system's operation? How do these benefits compare with the resources used? One of the greatest benefits with which an insurance system rewards society is stability in families. Insurance prevents families from experiencing the great hardships caused by unexpected losses of property or the premature death of the family income provider. Insurance allows families to continue their activities in a much more normal fashion after a loss than would be the case if no insurance existed.

Insurance is also very useful to businesses. Insurance aids the planning process because the planner knows a property loss will not mean financial ruin, and the future of a business cannot be destroyed by a fire or the death of a key person.

Insurance facilitates credit transactions because creditors are more willing to lend money if the debtor's death does not make collection of the loan difficult or impossible. Likewise, lenders are more willing to make property or real estate loans if they know a disaster cannot destroy the financial security standing behind their loan.

An economist would give insurance system high marks because it functions as an antimonopoly device. That is, if no insurance system were available, only the largest businesses could sustain losses and remain in operation. Without insurance, there would be a tendency toward monopoly in many industries. For example, one of the nation's largest chains of grocery stores could probably lose one of its stores in a fire and remain in business, whereas a mom and pop grocery would probably have to close permanently if an uninsured fire were to destroy its only store. Smaller chains of stores could not sustain uninsured losses as well as the larger chains. Insurance allows the smaller operators to pool their exposure to loss and thus remain competitors in an industry.

Financiers recognize that insurance availability has a tendency to lower a firm's cost of capital because both creditors and investors would charge much more for the use of their money if it were subjected to the risks associated with natural disasters in addition to business risks. In addition, without insurance, firms would have to hold more money in relatively nonproductive near cash reserves to protect themselves against the rainy day.

Insurance companies, and the organizations they support, contribute directly to society's welfare in many ways relating to loss prevention and medical research. Insurance companies are very important financial intermediaries. Annually, life insurance companies collect billions of dollars in people's savings and reinvest these amounts in the economy. Property insurers also maintain billions of dollars in their reserve accounts that are invested in our private enterprise economy. Insurers provide a useful service to savers by evaluating and selecting sound investments. They also provide a service to business firms and governmental units at the local, state, and federal levels, In general, business and government borrowers do not find it practical to use the small savings streams of individuals, but they can effectively use the river of funds made available by insurance companies.