Insurance and Economic Development: Growth, Stabilization and Distribution

Insurance is a largely invisible yet ubiquitous part of our economies. Our health, movements, purchases, homes, and even lives are usually covered by insurance. Without insurance, the unpredictability of the future would be too great and it would be difficult to take risks and innovate. In other words, insurance typically allows people to break the psychological and financial barriers which normally prevent them from engaging in potentially riskier activities thus forgoing greater reward and innovation.

This paper presents a framework for understanding the macroeconomic role of insurance, based on its economic contribution to the development of the economy and society, beyond the traditional role of financial intermediary and long-term investor. More specifically, the paper provides a conceptual framework for analyzing insurance interactions with the wider economic development by looking at three main functions: economic growth; stabilization; and distribution. In addition, it sheds some light on the relationship between insurance and innovation, and the potential future development of insurance activities in view of major changes in technology (“Big Data”), the nature of risk (notable climate risk) and social expectations around risk. It also includes reflections on the weaknesses and potential downsides of insurance for the functioning of the economy – including the risk of failure in insurance, the consequences of “over-insurance” and of involvement in pure financial activities.