ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT

For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. The Insurance Act has strict provisions to ensure that insurance funds are invested in safe avenues, like Government bonds, companies with record of profits and so on.

As on 31.3.2006, the total investment of the LIC exceeded Rs.520, 000 crores, of which nearly Rs.300, 000 crores were directly in Government related securities, nearly Rs.16, 000 crores in the State Electricity Boards, nearly Rs.22, 000 crores in housing loans, Rs.19, 000 crores in the power generation sector and Rs.10, 000 crores in water supply and sewerage systems. Other investments included road transport, settling up of industrial estates and directly financing industry. Investments in the corporate sector exceeded Rs.30, 000 crores. These directly affect the lives of the people and their economic well-being.

The LIC is not an exception. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premia of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insures in India are new and have accumulated funds equal to about one-eight of the LIC’s. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development, would be of similar proportions.

A life insurance company’s funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policyholders. The management of life insurance companies is required to keep this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the LIC, benefit the society at large.

Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, floods, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes by a terrible fire. Insurers cover also the loss to financiers, if their debtors default.