Cost and Benefits of Insurance

The products and services the insurance industry provides offer many benefits to society. Today's insurance provides protection by reimbursing people when their property is damaged or they suffer some other loss. Insurance helps individuals and business owners resume their normal standard of living and operations, which also benefits society as a whole. The primary benefits of insurance include

• payment of losses;
• economic growth;
• credit support;
• loss prevention; and
• peace of mind.

Payment of Losses

If a business burns down and has no means to resume operation, it would mean financial hardship for the owner. But the negative impact would extend beyond the owner and affect
employees (who now are unemployed);
those from whom the business purchases raw materials, goods or services (who now must find a new customer); and
those to whom the business provides goods and services (who now must find another business to fill their needs).

The proceeds of an insurance policy benefit everyone by restoring the insured person or organization to the same financial condition as before the loss and preventing the loss from rippling out and affecting others negatively.


Economic Growth

The insurance industry plays an important role in the nation's economy. It is second only to the commercial banking industry as a source of investment funds because insurance companies invest the billions of the premium dollars they receive annually in a wide range of investments.

Insurance companies use premiums collected from policyholders to
pay for claims;
pay for cost of doing business; and
build cash reserves for future loss payments.

Cash reserves are invested in federal and municipal bonds that are used to build roads, schools and utilities. Reserves are also invested in commercial developments and the stock market. These investments promote economic growth in communities and support the insurance company's requirement of maintaining sufficient capital reserves to pay future losses and earn a profit

Loss Prevention

Insurance also benefits society by encouraging activities and devices that reduce the amount of losses and their economic impact.

Seat belts and other passive restraints in automobiles significantly reduce the extent of injuries suffered by vehicle occupants involved in auto accidents. Insurance companies were a major force behind requiring seat belts as standard equipment in all vehicles. You may have noticed the "UL Approved" label on an appliance you own. UL stands for Underwriters Laboratories, an insurance industry think tank that develops safety standards for items used in residences and businesses.

Insurance agents and risk managers often work with individual and commercial clients to implement loss prevention measures such as security systems, better construction materials or employee disaster evacuation plans. The life insurance industry also educates individuals and businesses on the need to develop financial plans in the event of a premature death of a breadwinner or key executive. Helping clients to eliminate or reduce the amount of loss and human suffering has long been a part of the insurance industry.


Credit Support

Banks and credit institutions rely on insurance to make sure they can recover loans if disaster occurs. Insurance allows borrowers to guarantee creditors that their investment is protected against disasters.

Insurance protects
the value of property from unforeseen disasters; and
a client's ability to pay back loans if illness or premature death occurs.


Cost to Society

Despite its benefits, insurance is not without costs. Insurance can inadvertently create a situation where losses are more likely to occur. For example, no one would burn down his or her house if he or she had to bear the financial burden. Tempted by the opportunity offered by insurance coverage, unscrupulous people commit arson simply to access policy proceeds. This is an insurance cost because the loss would not have occurred unless the arsonist believed he or she could collect on the policy. In other words, without insurance, arson for profit would not exist.

In a less sinister but equally damaging way, some people aren't as careful to prevent losses when they have insurance. You may have heard someone say, "So what if something happens to my property—that's why I have insurance." They don't cause the loss intentionally, but are indifferent as to whether it occurs. This indifference to loss leads to damage and injury that could have been prevented, and it also is considered a cost of insurance.

While insurance provides significant benefits our society depends on, it is not without its costs. In addition to the physical and human resources consumed in the insurance industry, insurance also creates some losses that otherwise would not occur, such as deliberate fires—arson—or needless damage and injury caused by indifference.

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