CAPUT58

The growth of the nation’s economy is due to the presence and usage of physical capital and human capital that businesses in the system as a totality possess. When the economy expands, job opportunities are created. Without such growth, there would not be sufficient job opportunities for the people, and unemployment will result. The fact is that both forms of capital are valuable - and both are destructible.

The possible untimely destruction of these two forms of capital is a risk few businesses can afford to take. If a business fails, the individual worker and the economy will suffer. It is for this reason that both forms of capital should be insured or protected in some ways.

This is where insurance comes into play as an instrument of financial preservation. The protection it confers in no small way provides comfort to people. It is a powerful tool for risk management. Insurance, as an economic device provides the insured with financial certainty and security in an environment that is filled with the possibility of losses.

In strict terms, insurance cannot protect property or lives, but it can protect those insured against the adverse financial consequences of losing property and lives. For example, a factory, which is insured, does not prevent it from being burnt down. However, the insurance money collected can be used to construct a new factory in place of the destroyed one.

Likewise, an insured person cannot be protected against dying or disease, but the dependent is protected financially if such events precipitate unexpectedly. In any of such similar cases, the insured would be in economic dire straits if not for the financial protection conferred by insurance. In short, insurance as an economic device provides the insured with financial certainty in an environment that is filled with the possibility of losses. In providing such benefits, insurance brings peace of mind to people - and to society at large.

Another benefit of insurance is its ability to provide for more optimal use of economic resources. In the absence of insurance, individuals and businesses will have to create and maintain a relatively large contingent fund to meet the many pure risks they have to assume. The potential losses and consequential losses due to capital destruction must be met by funds generated internally. More of the profits will have to be retained in the business instead of distributing them to the owners. This is necessary because the business needs funds to grow, and plowing back the profits is one way to provide the funds needed internally. Now there is an added burden to set aside funds for such contingency. This would, in effect reduce the owners’ income further.

To safe guard contingent funds, investment risk must be reduced to the minimum. As such, it will be necessary to invest in low yielding but secured investment like bank deposits. Such a conservative investment strategy will earn low interest income for the funds. Keeping the funds in such low yielding investment would deny the business the opportunity of investing more productivity. With insurance, the risk of loss is minimized or eliminated through transference. The contingent fund against such risks could also be created immediately. With the needed funds to cover losses in place, the business has more space to utilize its earnings - either for increasing the income of owners through higher distribution of profits or to employ them for higher yielding investment. And it is the “magic” of insurance that made all these possible.

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