Effects of UK Insurance Industry to the Economy Essay Example for Free

Effects of UK Insurance Industry to the Economy Essay The UK insurance industry is the fourth largest in the world. It comes after USA, Japan and Germany and is definitely a major contributor to the economy. The number of people employed in the insurance industry of UK is increasing day by day. The Insurance industry contributes to the economy by providing businesses and individuals risk management. There are many services this industry provides. It ranges from automobile insurance to life and health insurance. Pension and savings are yet other forms of insurance available. Almost 332,000 people are employed in this industry (Association of British Insurers, 3, 2007). Insurance is another name for risk management. Insurance helps individuals and businesses to avoid financial or other loss. We can say it acts as a hedge against unavoidable or avoidable losses. This risk of loss is then transferred to some other entity, usually the insurance company. In exchange the business or individual seeking risk management gets a premium. The company that provides this risk management or insurance is the Insurer (Mehr et la, 13-45, n. d. ). Almost one third of people working in the entire financial market of UK are employed in the insurance industry. This number is twice the number of people in the car manufacturing companies and almost thrice the number employed in the utility industry. The UK insurance industry is one of the biggest in Europe. This industry gave a record of ? 174bn premium income in the 1990s. Though in the early years of 1990s, due to economic recession the insurance industry was not doing that good, but in the second half this industry started to grow and has been giving large numbers of premium profits since then (IFSL, n. p, 2001). In 17th century trading was in its primitive stages. Industrialization was a new phenomenon. Insurance was one element that fostered the growth of these and hence helped the economy prosper. Due to insurance, businesses were able to take risks and expand themselves. In 1688, GDP of England was approximately ? 6 billion (Lindert Willamson, n. p. 1982). After 1688 to 1759, there was not much growth in the national income. Till 1800 the growth was only 1% per year. At this rate our national income should be about ? 66 billion. However, this is not the case. Today our GDP is more or less ? 1000 billion. The main help in growth of economy came from insurance. Without insurance industry, our nation would have been living in a less prosperous way. Though all of this development is not due to insurance alone but it was the driving force that pushed the economy towards this prosperity. Today, insurance has a very vital role. According to an economist: â€Å"The non-existence of markets for the bearing of some risks in the first instance reduces welfare for those who wish to transfer those risks to others for a certain price, as well as for those who would find it profitable to take on the risk at such prices. But it also reduces the desire to render or consume services which have risk consequences† (Arrow, 945 946, 1963). Insurance is important because it has the ability to transfer risk. This control of risk helps businesses to keep moving forward. Insurance might not be important to people who are indifferent to risks. Such societies might have other forms of risk transfer protocols i. e. family. Hence we can say that in order to find out how much an economy will benefit from insurance, depends upon the culture of that place. In 1990, a study was done by Outreville. He took almost 45 developing countries and found out the relationship between insurance and national income. According to him there is a non-linear relationship between insurance premium and GDP. He also specified that the relation ship might not be that clear but it certainly is a positive one. In the light of his research we can conclude that if the insurance industry generates more premiums then the country might have more income (Outreville, n. p, 1990). Another study was done in 2000 by Ward and Zurbruegg. According to them insurance definitely helps in prosperity of the economy (Ward Zurbruegg, 489-507, 2000). It is also believed that if government tries to take position of the insurance industry it can lead to increase in levels of risks. In 2003, Priest did a research and found out that if the government has a safety net this can also lead to more risks. This safety net is actually savings and loans deposits which are there for the disabled. However, more savings might lead to more claims (Priest, 71-80, 2003). There have been quite some changes in the UK’s insurance industry in the past decade. Many major companies have undergone big changes. Commercial Union and General Accident are now called GCNU. They have merged to form a new bigger company. UK’s London market is also different in its own sense. It contains almost twenty large international insurance and reinsurance companies. It is the centre of world’s insurances. Businesses from all over the world get insured here. Two of its largest insurers, Lloyd’s and the International Underwriting Association of London (IUA), also provide various services (Joe, n. p, 1998).