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As defined in Insurance Act (Act No.

2427) a "contract of insurance" is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. In other terms it is a guard against pecuniary loss arising on the happening of an unforeseen event, thus helping persons to have security with regards to their property, life and interest upon happening of an event out of their control. Majority of the people in developing countries like the Philippines is unaware of the benefits that can be derived from the Insurance besides from the security given to them in cases of loss or damage. Insurance market activity may contribute to economic growth, both as financial intermediary and provider of risk transfer and indemnification, by allowing different risks to be managed more efficiently and by mobilizing domestic savings. Insurance doings may add to the economic growth by improving the financial system functions, both as a provider of risk transfer and indemnification and as an institutional investor, in the following ways: (1) promoting financial stability, (2) facilitating trade and commerce (the most ancient insurance activity), (3) mobilizing domestic savings, (4) allowing different risks to be managed more efficiently by encouraging the accumulation of new capital, (5) fostering a more efficient allocation of domestic capital, and (6) helping to reduce or mitigate losses. 1 In addition, there are likely to be diverse effects on economic growth from life and nonlife insurance (property-liability) given that these two types of insurance protect households and corporations from different kinds of risks that affect economic activity in diverse ways. Moreover, life insurance companies facilitate long-term investments rather than short-term investments as is the case for nonlife insurance companies One of the benefits we can obtain from Insurance is it facilitates credit by providing security for bank lenders and in the event of borrowers default. Given that banks and insurers have mutual exposures in many areas, banks have unbundled their credit risks to insurance providers mainly through both the securitization of credit portfolios (asset-backed securities and collateralized debt obligations) and derivatives (credit default swaps). On the insurance side, insurers have transferred credit risk to banks through liquidity facilities and letters of credit. Insurance as we said earlier is designated to help guard many risks of a business can face. The risks may consist of theft and loss of tools and equipments, crime coverage including robbery and even employee among others. By paying a small premium to the insurance company, the business can protect itself against the odds of sustaining a larger financial loss when loss transpire. When Insurance gives persons security against loss, it is expectant that the person will be more persistent in engaging in his business for the boost of our economy. Insurance helps also to encourage the establishment or exploitation of new and necessary industries to promote the economic growth of the country. It is one form of security to business enterprises. An entrepreneur engaging in a new and indispensable industry faces uncertainly and

assumes a risk bigger than one engaging in a venture already known and developed. Like a settler in an unexplored land who is just blazing a trial in a virgin forest, he needs all the encouragement and assistance. Usually loss is incurred rather than profit made. It is for these reasons that the insurance contract is obtained- to lighten onerous financial burdens and reduce losses. Contributions of Insurance to Growth and Development: Insurance serves a number of valuable economic functions that are largely distinct from other types of financial intermediaries. In order to highlight specifically the unique attributes of insurance, it is worth focusing on those services that are not provided by other financial services providers, excluding for instance the contractual savings features of whole or universal life products. The indemnification and risk pooling properties of insurance facilitate commercial transactions and the provision of credit by mitigating losses as well as the measurement and management of non diversifiable risk more generally. Typically insurance contracts involve small periodic payments in return for protection against uncertain, but potentially severe losses. Among other things, this income smoothing effect helps to avoid excessive and costly bankruptcies and facilitates lending to businesses. Most fundamentally, the availability of insurance enables risk averse individuals and entrepreneurs to undertake higher risk, higher return activities than they would do in the absence of insurance, promoting higher productivity and growth. The management of risk is a fundamental aspect of entrepreneurial activity. Entrepreneurs manage the risk of accidental loss by weighing the costs and benefits of each alternative. In a structured risk management process, this involves: (1) identifying the exposures to accidental loss; (2) evaluating alternative techniques for treating each loss exposure; (3) choosing the best alternative; and (4) monitoring the results to refine the choices. Those who do not apply a structured process still make decisions about risk, although sometimes by default rather than design. The scope of an economys insurance market affects both the range of available alternatives and the quality of information to support decisions. For example, a manufacturer might produce only for the local market, forgoing more lucrative opportunities in distant markets in order to avoid the risk of losing goods in shipment. Transport insurance can mitigate this loss exposure and enable the manufacturer to expand. Similarly, to avoid the risk of total loss from drought, a commercial farmer may keep half of his seed in reserve. Crop insurance can protect against drought and permit all of the seed to be planted for a smaller premium than the cost of holding half in reserve. Thus public policies that encourage insurance operations improve the economys productivity by broadening the range of investments. Insurers also contribute specialized expertise in the identification and measurement of risk. This expertise enables them to accept carefully specified risks at lower prices than nonspecialists. They also have an incentive to collect and analyze information about loss exposures,

since the more precisely they measure the cost of risk, the more they can expand. As a result, the insurance market generates price signals to the entire economy, helping to allocate resources to more productive uses. On the investment side, due to the long term nature of their liabilities, sizeable reserves, and predictable premiums, life insurance providers can serve an important function as institutional investors providing capital to infrastructure and other long term investments as well as professional oversight to these investments. Of course, these benefits are fully realized only in markets where insurance providers invest a substantial portion of their portfolios domestically. The net result of well functioning insurance markets should be better pricing of risk, greater efficiency in the overall allocation of capital and mix of economic activities, and higher productivity. Importantly, these unique functions of insurance should be complementary to banking and financial sector deepening more broadly. For instance, insurance facilitates credit transactions such as the purchase of homes and cars and business operations, while depending in turn on well functioning payment systems and robust investment opportunities.2 Without insurance, business activities too fraught with the risk of uninsured losses and evolving financial hardships. Entrepreneurial spirits are dampened or business activities are inhibited if there is no insurance. There would be less forward planning and less economic resilience because of higher uncertainty and higher unemployment. Through insurance, business can speed up the transfer of new technologies to market the place, cover exploration risks etc. there would be also sound internalization of risk costs by business and governments. Insurance also helps in creditworthiness, access to loans and enhances equity in capital.3 The basic rationale of insurance is to allow security against future risk or provides protection against accidents and uncertainty. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid. Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Covering larger risks with small capital Insurance assuages the businessmen from security investments. This is done by paying small amount of premium against larger risks and dubiety. Helps in the development of larger industries Insurance provides an opportunity to develop to those larger industries which have more risks in their setting up.

Insurance boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover. The terms "accident" and "accidental" as used in insurance contracts have not acquired any technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes place without one's foresight or expectation an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected.4 As explained above insurance gives security to the persons obtaining insurance contracts against loss, damage or liability arising from an unknown or contingent event. Thus, when a person wants to establish a business of his own, he can obtain an insurance contract to give further trust in his trade, that whatever may happen in the future, he is assured that the losses in cases of accidents can be reciprocated by the insurance he obtained. An insurance contract then gives security to persons engaged in trade, giving them more opportunity to explore and expand more their commerce because they have their security. Insurance is then encouraging business efficiency through giving persons engaged in business having the same interest, to obtain security in their trade having the possibility to expand their range. In addition, it is important to mention that insurance is appearing to potential investors because it is uncorrelated with other types of business activities. Finally, as is true for banks, there are also inter-linkages between insurance companies and stock markets for risk transfer reasons. Insurance companies transfer to capital markets not only market risk by hedging of embedded options in life insurance portfolios but also insurance risks related to natural catastrophes. On the insurance side, capital markets may transfer market risk to insurance companies when the latter write options and buy bonds with embedded options.5

Skipper, 1997, pp. 2-7

Dr. Lael Brainard, Bernard L. What is the role of insurance in Economic Development, 2008, pp 2-3, 2008.

Eberhard Faust, Munich Re, The Fundamental Role of Insurance: Enabling Economic Growth and Social Development 2009. p5 FINMAN GENERAL ASSURANCE CORPORATION, VS.THE HONORABLE COURT OF APPEALS AND JULIA SURPOSA, G.R. No. 100970, September 2, 1992
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Marco Arena, Does insurance market activity promote economic growth? A cross-country study for industrialized and developing countries, December 2008

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