Insurance manages risk. Insurance companies employ statistical analysis to manage their own exposure to losses and grow profits. Insurer’s role in regards to economic development is understated, yet critical for growth.
Insurance companies work by collecting premiums in exchange for making payouts to clients amidst catastrophe. Insurers invest premium money into stocks and bonds for profits, prior to paying out claims.
All items of worth may be insured. Insurance companies back financial products, real estate, health care, and the earnings power of diverse entities.
Insurance enables institutions and private individuals to take calculated risks. Because of insurance, these parties may purchase goods and make investments that build the economy. Without insurance, individuals would be forced to stockpile low-return cash to guard against losses. Of course, savings may always be lost due to disability, natural disaster, or bank failure that is not insured. Rampant bankruptcy and economic collapse are the inevitable results for any culture that lacks adequate insurance coverage.
The insurance industry is highly regulated due to its importance to the economy. Governments regulate insurers in terms of reserve levels, investment strategies, and sales practices.
Mismanaged insurance companies can create financial panic. Speculation that insurers cannot “make good” upon promises leads to massive withdrawals of investments and savings.