How Insurance Companies Help the Economy
By Richard A. McGrath, CIC, LIA
Think of an insurance company and, unless you’ve had a significant claim paid, your thoughts may not be too positive. But they should be.
It is true, insurance companies can cost you thousands of dollars a year and you may not receive any return on that investment, unless you file a claim. Yet, it’s difficult to think of another industry that has a more positive impact on the economy. In fact, without the insurance industry, the economy would practically come to a standstill.
How does the insurance industry affect the economy? The role of insurance, of course, is to reduce risk. The higher the risk, the less likely a business is to make an investment. But insurance companies do much more. Consider a few examples:
Obtaining financing. Consumers cannot obtain a loan to purchase a home, car, boat or airplane without proof of insurance. Likewise, business owners and would-be entrepreneurs cannot obtain financing to buy a commercial building or commercial equipment, or to otherwise invest in their business, without proof of insurance.
Lenders won’t lend without proof of insurance, because the risk would be too high.
Without financing, businesses are unable to expand, and when businesses are unable to expand, they do not create jobs. In fact, they may lay off some of their employees. Without jobs, consumers have less money to spend and the economy stagnates. Over time, peoples’ quality of life suffers. because their income decreases.
Expanding business. Whether businesses are launching a new product, signing a new sales contract or purchasing a new company, the business needs assurances that the other party is conducting business in good faith. Insurance provides the necessary protection, in case business doesn’t proceed as planned.
Likewise, businesses would be reluctant to hire new employees if not for workers’ compensation insurance, which protects the employer while providing the employee with income when an accident temporarily puts the employee out of work.
Paying claims. The U.S. insurance industry pays out more than $300 billion a year in policy benefits and claims.
These funds help insured consumers and businesses recover from their losses, whether it’s a loss of property, the loss from a lawsuit or the loss of a loved one. Funds paid out by insurers enable people to rebuild, maintain their lifestyle after
a breadwinner dies or becomes disabled, and replace property that is stolen or damaged. For businesses, payment from claims may be necessary for a business to continue operating, but insurance is also used to plan for succession, protect intellectual property and pay damages from unanticipated liability.
As just one example of the benefit of insurance, consider the rebuilding taking place in New York and New Jersey as a result of damage caused last year by Superstorm Sandy. While some claims are still being worked out, insurance companies will end up contributing $10 billion to $20 billion toward the damages caused by Sandy.
Funding development. Funds from premiums that are not used to pay claims and operating expenses are invested by insurance companies. Insurers have $1.4 trillion invested in the U.S. economy, according to the Insurance Information Institute (III).
Insurance companies invest in bonds that are used to finance major projects, both in the public sector and the private sector. They invest in commercial and retail development, apartment buildings and other projects. They also invest in stocks, which increases prices, to the benefit of all investors.
The International Association of Insurance Supervisors (IAIS) noted that by investing in bonds and other securities issued by financial institutions, insurance companies provide “an important contribution to the financial soundness of banks and more broadly to financial stability. In a similar fashion insurers are also allocating capital to the real economy by purchasing debt securities of industrial companies or through real estate investments.”
Paying taxes. Insurance companies and their employees pay taxes, which fund government programs that help needy people, contribute to education, protect the country, and maintain and expand the infrastructure.
Managing their business. The III notes that there are 6,115 insurance companies in the United States, and they accounted for 2.6 percent ($398 billion) of the country’s gross domestic product (GDP) in 2011. The U.S. insurance industry employed 2.3 million people in 2012, including 1.4 million who worked directly for insurance companies.
As these examples show, insurance companies do a great deal to benefit the economy. Remember that the next time you pay your premiums.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at email@example.com .
This article is written for informational purposes only and should not be construed as providing legal advice.