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Benefits and Costs of Insurance to Society

Insurance is the pooling of unforeseeable losses through the transfer of such risks to insurers, who agree to indemnify insureds for such losses, provide other monetary benefits in the event of their occurrence, or render services related to the risk.

According to the preceding definition, an insurance policy or arrangement typically includes the following characteristics:

• Loss aggregation
• Payment for unavoidable losses
• Transfer of risk
• Insurance coverage

The Benefits of Insurance to Society

Loss Indemnification

Following a loss, indemnification allows individuals and families to be restored to their previous financial position. As a result, they will be able to maintain their financial security. Because insureds are either partially or completely restored after a loss, they are less likely to apply for public assistance or welfare benefits or to seek financial support from family and friends.

Indemnification for businesses allows them to stay in business and employees to retain their jobs. In short, the indemnification function is one of the most important social and economic benefits of insurance because it contributes significantly to family and business stability.

Worry and Fear Reduction

People have more peace of mind when they know they are covered in the event of a loss, and this is true both before and after a loss. People who have long-term disability insurance do not have to worry about losing their income if they suffer from a serious illness or accident. Worry and fear are also reduced when insureds know they are covered by insurance.

Funding Source

The insurance industry is a significant source of capital for investment and accumulation. Premiums are collected in advance of the loss, and funds that are not required to cover immediate losses and expenses can be loaned to businesses. Typically, these funds are invested in shopping malls, hospitals, factories, housing developments, and machinery and equipment.

Loss Prevention

A wide range of loss-prevention personnel, including safety engineers and experts in fire prevention, occupational safety and health, and product liability, are employed by insurance companies and are actively involved in numerous loss-prevention programs. Loss-prevention activities reduce both direct and indirect losses, also known as consequential losses. Because both types of losses are reduced, society benefits.

Credit Enhancement

Insurance reduces a borrower’s credit risk by guaranteeing the value of their collateral or providing greater assurance that the loan will be repaid. For example, when a house is purchased, the lending institution usually requires property insurance on the house before granting the mortgage loan. Before granting a temporary loan for Christmas or seasonal business, a company may be required to insure its inventories.

The Costs of Insurance to Society

Despite the fact that the insurance industry provides enormous social and economic benefits to society, the social costs of insurance must also be considered. The following are the major social costs of insurance:

Business Costs

Insurers use up scarce economic resources in order to provide insurance to society. The cost of doing business is an important cost. Property and casualty insurers incurred underwriting costs of approximately 28 percent for each underwriting dollar in the previous decade. Life insurers incurred costs for operating expenses, taxes, and investment expenses totaling 17% of total expenditures.

False Claims

The submission of false claims is the second cost of insurance. The following are some examples of fraudulent claims:

• Auto accidents are staged or fabricated in order to collect benefits.
• Dishonest claimants fabricate slip-and-fall injuries.
• Insurance companies are notified of bogus burglaries, thefts, and vandalism.
• False health insurance claims are filed in order to collect benefits.
• Dishonest policyholders purchase life insurance policies on suspected insureds and then arrange for their deaths.

Payment of such fraudulent claims raises premiums for all insureds. The existence of insurance also motivates some insureds to purposefully cause a loss in order to profit from insurance. These societal costs are borne directly by the society.

Exaggerated Claims

Another insurance cost is the filing of exaggerated or “padded” claims. Even if the insured did not cause the loss on purpose, the dollar amount of the claim may exceed the actual financial loss.

Exaggerated Claims include the following:

• Attorneys for plaintiffs sue for high-liability judgments that exceed the victim’s true economic loss.
• In order for insurance payments to cover the collision deductible, insureds inflate the amount of damage in auto collision claims.
• Disabled people frequently lie in order to receive disability income benefits for a longer period of time.
• Insureds exaggerate the amount and value of the stolen property from a residence or business.

Exaggerated claims must be acknowledged as a significant social cost of insurance. To cover the additional losses, premiums must be raised. As a result, disposable income and other goods and services consumed are reduced.