This series of papers considers the role of insurance in society, focusing in particular on the benefits it brings and risks it mitigates.
The social value of insurance
Insurance has a long and distinguished history. The UK has played its part in the insurance story, from as far back as the reaction to the Great Fire of London in 1666 and the development of insurance trading in Edward Lloyd’s coffee shop in 1688.
It is an essential part of everyday life, playing a crucial role in both economic development as well as having a role in supporting wider societal ends.
Though insurance products are provided in a commercial context, both for individuals and for corporate customers, they clearly serve a wider purpose. Insurance helps oil the engine of the economy, for example in underwriting trade through trade credit. It also provides peace of mind to the public through collective insurance for a host of perils including flood, fire, and health. In short, the economy and society as a whole benefits from the certainty insurance brings through (to quote our first paper in this series):
Efficiently protecting the public through innovative risk management techniques.
Freeing up businesses and professionals from everyday risks and encouraging innovation and competition.
Relieving the burden from the state and providing comfort to individuals by providing safe, effective and affordable pension savings, protection and de-cumulation products that convert pension savings into retirement income.
These are just some of the areas where insurance contributes to society. As the professional body for the insurance sector dedicated to protecting the public, the Chartered Insurance Institute is looking at various aspects of the social role that insurance plays. We thought this might be helpfully brought to life with a series of short papers considering this concept in greater detail, setting out the purpose, which is often intangible, of insurance and the benefits it brings and risks it mitigates. Insurance is vital. Just imagine a world without it.
Cost of Doing Business
One important cost is the cost of doing business. Insurers consume scarce economic resources—land, labor, capital, and business enterprise—in providing insurance to society. In financial terms, an expense loading must be added to the pure premium to cover the expenses incurred by insurance companies in their daily operations. An expense loading is the amount needed to pay all expenses, including underwriting and loss-adjustment expenses.
Costs Of Insurance
The loopholes of insurance have given rise to more and more incidences where the insurance system is abused.
Inflated Bills Which Translate to Increased Total Cost and Higher Premium
Take hospitalisation insurance for example. Insured patients tend to opt for private hospitals and wards of higher class than their uninsured counterparts. The reason is simple. The insured patients are paying the same amount of premium regardless of their medical expenses which will be shared among all insured.
Although insurance companies have come up with measures to encourage the insured to choose only what is necessary for them by giving them cash rewards for opting for public hospitals and wards of lower class, these have been proved ineffective or insufficient. As a result, the inflated medical bills have led to increased total cost to the insurance company and hence higher premium to be borne by all the insured. Consult your economics tutor on how inflated medical bill will increase the cost to society or raise this question for discussion in your economics tuition class.
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