Why do we need insurance?

Insurance helps people and businesses to assess, manage and reduce their risks. It benefits policyholders as it provides a means of turning large, unexpected costs into manageable smaller payments. Without insurance, people would be less likely to engage in some activities of modern life because the potential financial costs they would be exposed to would be too great.

For example, people would be less likely to start their own business, since they would have to be entirely responsible for the cost of an accident or fire. They might also be less likely to buy their own home for the same reasons.

Benefit: consumer and business confidence
Insurance provides individuals and companies with the confidence to go about their daily life and business and to enter into transactions with others. They can be secure in the knowledge that the company they are doing business with will be able to continue to operate and will be able to meet its obligations.

For example, holidaymakers gain comfort and confidence from booking with a hotel that has insurance which would refund their deposit should a significant event, such as a fire, close the hotel.

Benefit: control of risks and promotion of safe practices
Society in general benefits from a competitive insurance market that can use sophisticated risk pricing to encourage better risk management practices. The prospect of lower premiums can change behaviour, encouraging individuals and businesses to reduce their risks where they can by altering their behavior or taking preventative measures. Examples include individuals giving up smoking to reduce their life insurance premiums or fitting smoke alarms to reduce their household insurance costs, and businesses implementing more effective risk management systems to reduce their liability premiums. Another common example is the promotion of safer driving through no-claims discounts on motor premiums.

Benefit: long-term investment in the economy
Insurers invest the premium income they receive, making them among the largest institutional investors. For life insurance companies in particular, the products they write are long-term in nature, and so correspondingly long-term investments are made and held to maturity. This steady flow of long-term capital provided to the financial markets by the insurance industry is crucial for the financial system as a whole, as it reduces market volatility and thus contributes considerably to the stability and functioning of markets.

Benefit: stable and sustainable savings and pension provision
Insurers are significant providers of savings and pension products. The products they provide are fundamental to old age financial security, particularly in light of ageing populations. As well as using their experience and sophisticated models to ensure a fair premium is charged, insurers are able to combine different risks. This reduces the likelihood of claims being significantly different from what was assumed in the underwriting and in turn reduces the costs of offering the products.

For example, taking on both the longevity risks inherent in pension products and the mortality risk from life assurance products reduces the financial impact of changes in life expectancy (increases in life expectancy will increase the costs to the insurance company for pensions products, as they will need to pay out for longer, but have an offsetting benefit for the insurance company on life assurance products). Without a competitive and innovative insurance industry, many aspects of our modern society and economy would cease to exist or would function much less effectively.