Benefits and Challenges of Insurance -Economic principles (Essay Sample)

Benefits and Challenges of Insurance -Economic principles Due date Unit code Course name Institution affiliation Introduction The most important product being sold today is insurance since it guarantees protection against risk and uncertainty. Nevertheless, like any decision-making structure based on economy, it has its advantages and drawbacks. This will be a discussion of the economics of insurance with particular emphasis of the benefits and drawbacks that are likely to be encountered in the process and the overall discussion. Benefits of Insurance Risk Mitigation: Another advantage is that insurance helps in reducing risks that may be faced by an individual in the course of the activity. Insurance service providers such as insurance companies collect and aggregate funds from a large number of policyholders hence putting in place measures to disburse compensation in the occurrence of losses (Schulze, 2016). To ensure that this is the case, risk transfer makes it possible for people and corporate entities to offload potential losses to insurance firms in order to create more security in their financial affairs. Efficient Resource Allocation: Insurance also helps in proper management of resources because people and organizations are not forced to put much of their resources aside for potential losses that can be insured. Through risk shifting, financial risks are transferred from one party to another particularly insurance companies, thus enhancing better resource allocation assembling extra economic growth and production. Facilitation of Economic Activities: Insurance remains very important as it assists in the occurrence of many economic activities. For instance, property insurance facilitates access to loans and investments because one can offer his or her property on the insurance and receive the amount of cash he or she needs for a venture, liability insurance helps individuals and businesses protect themselves against potential legal suits. Were it not for insurance companies, many transactions in the economic world and investments would be considered too risky and beneficial for economic growth to be feasible. Challenges of InsuranceMoral Hazard: Risk selection is an essential type of problem in the insurance market, which is an unequivocal moral hazard. It occurs whereby the insured people or companies take high risks or do not take precautions to avoid certain perils as they are compensated when they occur by insurance. This behavior can also put more demands on claims and thus become more expensive for insurers and, as a consequence, affect all policyholders and their premiums. Adverse Selection: Adverse selection is when some buyers who are more adversely affected are more likely to transact (purchase insurance) as compared to buyers with fewer complaints. This could lead to increased rates for all participants which could make insurance an impossibility to some low-risk users and also has implications to market distortion. Regulatory Challenges: Like all forms of industries, insurance industry is regulated given the fact that it provides very sensitiv...