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 behaviour
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
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).