Role of Insurance in Economic Development of India .

Following points highlight the importance of insurance in economic

development:
1. Insurance encourages savings: Saving involves refraining from present
consumption. The investment can take place only when there are savings.

Insurance companies lead to economic development by mobilizing savings

and investing them into productive activities. Indian insurance companies
are able to mobilize long-term savings to support economic growth and
also facilitate economic development by providing insurance cover to a large
segment of our people as well as to business enterprise throughout India.
2. Insurance Promotes Capital Formation:
Capital formation maybe defined as increase in capital stock of the country
consisting of plant, equipment, machinery, tools, building, means of
transport, communication, etc. The process of capital formation envisages
three essential steps. These are:
a. Real saving: Mobilization of saving through financial and non-
financial intermediaries to be placed at the disposal of investor.
b. The act of investment: The contribution of insurance companies in
the process of capital formation appears at all these stages. Insurance
services act as a tool to mobilize saving, function as financial intermediary
and at times also indulge in direct investment. Also govt. has made
regulations under which every insurer carrying on business of life insurance
shall invest 25% of funds in Govt. securities and not less than 15% in
infrastructure and social sector.
The importance of Indian insurance industry is gauged by the fact that
annual amount of investible funds of LIC and GIC and its subsidiaries
amounted to over Rs. 20,000 crore and Rs. 10,000 crore are invested in
nation building activities, housing and other infrastructural areas.

c. Increased Employment: Prior to the liberalization of insurance sector

in India, the opportunities for employment were limited with the LIC of India
as sole employer. While some of the professionals left the country looking
for opportunities elsewhere, those who remained, worked within the
confines and constraints of public sector monopoly. This has further
constrained the opportunities for exposure to the development in rest of the
world. Liberalization and the opening up of sector to private players has now
created a vast opportunity for employment.
3. Development of the Rural Sector:
In India, the insurance companies are required to fulfill their obligation
towards rural and social sector. For this, Life insurers are required to have
5%, 7%, 10%, 12%, 15% of total policies in first five years respectively in
rural sector. Like wise General Insurers are required to have 2% 3% and 5%
thereafter of total gross premium income written in first five financial years
respectively in rural sector.

4. Insurance as financial intermediary:

Financial intermediaries perform the function of channelizing saving into
domestic investment. They facilitate efficient allocation of capital resources,
which in turn improve productivity and economic efficiency which result in
reduced capital output ratio. The insurance companies perform extremely
useful function in economy as financial intermediaries. These are as follows:

a. Reduction in transaction cost: Insurers help in reducing transaction

cost in economy by collecting funds from policyholders and investing the
same in different projects scattered over different regions. It is a specialized
and time consuming job.
b. Creating Liquidity: The policyholders, in case of loss, are not required
to wait for a long period for the amount of claim. It improves their liquidity.
c. Facilitates Economies of scale in Investment: Insurers are in the
position of financing large projects, railways power projects, etc. These large
projects create economies of scale, facilitate technological innovation and
specialization and thus promote economic efficiency and productivity.
5. Promotes Trade and Commerce:
The increase in GDP is positively correlated to growth of trade and commerce
in economy. Whether it is production of goods and services, domestic or
international trade or venture capital projects, insurance dominates
everywhere. Even banks demand insurance cover of assets while granting
loans for purchase of assets. Thus insurance covers, promotes specialization
and flexibility in the economic system that play contributory role in healthy
and smooth growth of trade and commerce.
6. Facilitates efficient capital allocation:
Insurance provides cover to large number of firms, enterprises and
businesses and also deploy their funds in number of investment projects. The
vast pool of knowledge and expertise so gained enable them to distinguish
between productive and high return projects. Therefore, they promote
efficient and productive allocation of capital resources, which in turn lead to
increased productivity and efficiency in the system.

7. Encourages Financial Stability and Reducing Anxiety:

Insurer promotes financial stability in economy by insuring the risks and
losses of individuals, firm and organizations. Because of uninsured large
losses, firm may not be able to compensate for it leading to its insolvency
which may cause loss of employment, revenue to supplier & Govt., loss of
products to customer, etc. Moreover, it relieves the tensions and anxiety of
individuals by securing the loss of their lives and assets.

8. Reduces Burden on Govt. Exchequer:

Insurance companies, particularly life insurers provide a variety of insurance
products covering needs of children, women and aged etc under social
security network and thereby reduce the burden on Govt. exchequer in
providing these services. This Govt., saves expenditure on these items and
amount can be utilized for more productive projects. To conclude, we can say
that insurance companies play an important role in economic development
of country.
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