Insurance and Economic Theory

Insurance and Economic Theory

The second half of this century witnessed the growth to maturity

 of the

insurance sector in most of the industrialized countries. The annual increase in

premiums collected is significantly higher than the depreciation of money and

far greater than the increase in Gross Domestic Product.

The ratio of total premiums written to the Gross Domestic Product of a

country is the measure most commonly used to evaluate the importance of

insurance to the economy. Although it does not give a complete picture of

insurance output because of the considerable variation in premium rates between

different countries, this measure has the advantage of being uninfluenced by

currency factors.

In most countries the primary source of statistics is the reports of the

governmental supervisory authority. The following statistics are taken from the

monthly economic studies ~ published by the Swiss Reinsurance Company.

This review has become the most reliable source of comparable insurance

statistics. More recently, the United Nations Conference on Trade and

Development (UNCT AD) has published a statistical survey on insurance

operations in developing countries which complements the statistics published

in Sigma. The information was compiled by UNCT AD with the help of a

questionnaire sent to governments and supervisory offices in all developing

countries .

With few exceptions, the ratio of total premiums to Gross Domestic Product

is much larger than 2 per cent for the industrialized countries and smaller than 2

per cent for the developing countries (Table 3.1). The relationship between

economic development and the importance of the insurance sector is further

confirmed when the ratio is analyzed for the least developed countries (Table

3.2).

This ratio has increased in almost all countries from 1960 to 1990. This is

an indication of the growing importance of the insurance sector in national

economies. The growth has been spectacular particularly in Japan and in the

Republic of Korea. By 1990, the Republic of Korea has the highest ratio

followed by the United Kingdom, the United States and Japan. On the other

hand, in some developing countries of South America and Africa this ratio has

remained low and reflects the economic situation experienced in these countries.

The influence of the insurance industry on the macroeconomic activity can

be analyzed from two viewpoints: (1) its role in providing indemnification, and

(2) its role as an institutional investor. At the macroeconomic level, the

insurance industry contributes to the formation of national income by creating

value added. The latter is often ignored in national accounting systems. The

service offered by the insurer is that of an intermediary and knowledge of the

cost of insurance helps to measure the effort made by the community to provide

itself with an insurance system. On the basis of premiums collected less

liabilities incurred ( and ultimately monetary compensation), this value added is

apportioned for the payments of salaries and commissions, dividends and

indirect taxes. The balance represents the gross profit (or loss) of the insurance

operation.

The contribution of the insurance sector to employment in a country also

reflects a fundamental difference between developed and developing countries

(Table 3.3).

Insurance is also a process of financial intermediation because the

production cycle for insurance is reversed. Payment is made before the service

is provided and therefore insurance companies built up reserves which are

commitments with respect to the insured parties. To measure the contribution of

insurance companies to the financing of the national economy, it would suffice

to compare the increase in technical reserves or provisions with the economy's

financial requirements.

An example of this measure for France (Outreville, 1987) shows the

growing importance of the insurance sector as a financial intermediary . An

analysis of the total annual increase in technical reserves of the insurance sector

divided by the annual increase in the gross capital investment shows that the

average ratio for the period 1976 to 1982 was equal to 20.5 compared to 13.8 for

the period 1969 to 1975.