Economics of Insurance

Overview

Insurance generally means buying (or constructing) a policy that will protect you from a certain predefined loss. For example, car insurance would protect you in the case that your automobile is involved in an accident, and would help you recover the lost value.



Insurance today, in particular life insurance, has taken on a role beyond insuring against a loss event (in this case, death). Regulations have allowed life insurance policies to take on a tax-efficient savings and investment role as well.

Economic Role

From an economics persepective, insurance products server two useful functions.

Moving Risk The first benefit of insurance is that it moves the bearing of risk from one agent, to other agents in the economy. This can be beneficial because it can move risk from those unable to bear it, to those that can. Moving such risks does not eliminate those risks, but it can reduce total costs of carrying those risks through diversification.

Investment as mentioned above, through innovations in life insurance, insurance companies have taken on a larger role of being the financial intermediary that brings savers and investors (in the sense of investing capital) together.

Factors Influencing Demand for Insurance