The Role of Insurance in the Economy

Insurance. What a pain! Your mortgage lender requires that you carry fire and other perils coverage (i.e., homeowners) insurance and sometimes even flood or earthquake insurance. Your auto lender requires that you carry physical damage coverage. Under the laws of many states, you are required to carry auto liability and/or no-fault liability insurance, often including uninsured motorist and underinsured motorist coverages. To many, insurance just represents dollars out of pocket with no benefit. This is an unfortunate attitude. Insurance plays a broad role in the worldwide economy, helping to assure that millions of transactions and other activities, economic and noneconomic, can proceed. Without insurance, local, state, national, and international business would quickly grind to a halt. Lenders would cease lending for purchases of land, buildings, homes, vehicles, or equipment. Without premises liability insurance, a simple slip-and-fall claim could put a small business owner out of business. Manufacturers could not sell products without liability insurance to respond in the event a defective product injures customers or other users of their products. Absent product liability insurance, a seller of a defective product who has no role in the design and manufacture of the product, could face a ruinous lawsuit or judgment.  The average individual has similar concerns. What are the consequences of an uninsured liability lawsuit—whether rising from an auto accident or a premises claim arising from homeownership question? The answer is often bankruptcy, which can follow a person for a lifetime. It can result in being turned down for a job, being denied credit, or receiving credit only at high interest rates. The concept of insurance is really very simple. In exchange for the insured’s payment of a relatively small sum of money—the premium—the insurer assumes the risk of financial consequences for the loss of the insured’s property (such as a house or car) or the risk of the loss presented by the costs of defending a liability lawsuit (and where appropriate, paying a resulting settlement or judgment). This can provide financial security for the average consumer—that is you—which strengthens our economy as a whole and spurs further growth.

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