The role of insurance in development [Archives:2005/874/Business & Economy]

By Mujib Abduljabar Radman
[email protected]
General Manager
Al-Watania Insurance Company
Supposing a big incident occurs at a factory or and industrial complex, and material damage occurs causing financial loss arising from the cessation of production, legal liabilities to third parties, and compensation for workers injured, what are the exploitable sources available to defer such financial losses resulting from damage to assets and liability claims? The solution is of a socioeconomic dimension.

Perhaps one could resort to personal resources; such as, emergency reserves allotted for such purposes. But, supposing such funds are not available or are insufficient for the purpose of adjusting the costs of repairing or replacing damaged assets, compensating workers and paying for liabilities, one would need to resort to borrowing from a bank. Except, that the chances of a bank accepting an application for a loan consequent to such an incident are bleak because of the confidence exhibited by the borrower not to mention the loan conditions which could be harsh.

To avoid having to be confronted with such a scenario, if the unfortunate party had resorted to Insurance, they would have saved themselves much pain and suffering by simply paying a fixed premium to an insurance company in consideration for the acceptance of transfer of the risk; thus, entitling the Insured party to compensation for their loss which would put them back into the same state they were in prior to the occurrence of the incident.

Another question any individual could ask himself/herself is, if I am the breadwinner of the family, and I was to lose my life or become disabled or lose my job, who would then support my family ?

From custom and past tradition, when there was strong family ties, if a member of the family was afflicted by a misfortune, one would expect assistance in cash or kind: but today, because of the demands of modern living, people have become pressed for funds and can hardly assist their next of kin. Therefore, the likelihood of the family becoming poverty stricken is imminent and especially in the absence of social security (like in Europe where the social security would provide such a family with their minimum needs for survival). Therefore, the sole available alternative would be insurance, which could offer levels of protection for individuals covering health care and paying steady incomes in case of a fortuity to the family.

Capital as we know is the result of the accumulation of surpluses from production minus depreciation. Capital in this case can be interpreted as material wealth in the form of plant, machinery, buildings, etc. and combined together form national wealth. Capital could be exposed to depreciation and depletion from two sources. The first is from natural depreciation/depletion (wear and tear/storage), and the second is from exposure to sudden occurrences that cause damage.

Protection from the first exposure can be sought by utilizing stronger and more durable materials or the allotment of cash reserves for the purpose of replacing worn-out assets with new ones. But such measures would only suffice for the purpose of replacement where wear and tear is consistent (perhaps one year or more depending on the nature and composition of the asset) but supposing the asset were exposed to damage from a sudden occurrence what would be the solution for such an accelerated need for replacement. Allotment of Reserves would not be suitable solutions for such fortuities.

Therefore, in essence, Insurance is a social tool for spreading the burden of loss that has fallen on an individual amongst a group of people. It is a mechanism that depends on the law of large numbers. The aggregate of the shares of individuals (insurance premiums) is utilized to adjust the damage that was inflicted upon the individual.

The economic benefits of insurance can thus be experienced by individuals and establishments alike; and ultimately, the national economy through the spreading of the losses across the whole and simultaneously compensating them or returning them to the same state they were in prior to the occurrence of the loss.

In this way, Insurance not only offers equitable protection to national wealth in all in forms; but, it also simultaneously offers protection to individuals, private and public establishments (government).

Below are interpretations of the effects of Insurance on the Economy:

– assisting to increase levels of retention against losses through the formation of emergency reserves (this is what project managers used to resort to in the absence of insurance and which was later considered misuse of wealth, even when kept in fixed deposit accounts with bank interest, considering that the interest was insufficient and susceptible to decrease by inflation not withstanding the fact that it meant the withholding of wealth that could be better utilized for the expansion of current projects). In lieu of a fixed premium payable to an insurance company, a project manager could manage liquidity in a more profitable manner.

– the provision of a higher degree of protection to the Capitalist against loss of material assets caused by natural disasters and human error related to modern industry. Insurance is also capable of extending cover to include loss of profit from cessation of production from a hazard insured against causing material damage. In this manner, Insurance plays also a socio- economic role by compensating for total or partial material losses that are caused to property. This means that property owners receive in the form of cash, compensation for the equivalent of what was insured to reinstate such property which guarantees permanency for the workforce and continued maintenance of production limits.

– facilitates the exchange of international trade with dependence on cargo marine, land, and air insurance policies as collateral security

In addition to the insurance of tangible investments against what is known as political and commercial risks encouraging government legislation and decrees to allow for the transfer abroad of the proceeds of documentary letters of credit or the value(s) of imported goods and audited profits on investments.

– the promulgation of knowledge about precautionary measures to combat and mitigate loss exposure. This role is a complementary element in the management of risk (diagnosis of source of risk, risk evaluation, risk retention and risk transfer to another through Insurance),

– the resorting to reinsurance by developing countries for the purpose of mitigating losses (transferring shares of the burden of losses onto the shoulders of the reinsurance companies) and recovering hard currency for claims paid in local currency.

For the national wealth to grow and prosper, the government needs to give the national insurance industry a boost by introducing legislation making insurance compulsory, setting standards compatible with international trade and industry, monitoring the industry, and issuing directives whenever necessary for the enhancement of the insurance industry.
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