The Role of Insurance to Economic Development

by Craig Berman; Updated September 26, 2017
Businesspeople working at conference table

Economic development carries risk. When business owners decide whether to add a new storefront in a gentrifying area of town or serve a niche audience that hasn’t yet been targeted by their products, they weigh the potential profits against the risk of failure. The availability of insurance helps development primarily by allowing businesses to mitigate that danger, providing encouragement for them to expand their operations.

Risk Mitigation

The primary way insurance helps economic development is via risk management. Entrepreneurs and business owners can control their exposure via insurance policies, buying protection against crime, damages, liability lawsuits or natural disasters that could otherwise prove catastrophic. Without insurance, for example, it would be difficult to develop beachfront property in an area at risk of hurricane, because a bad storm could wipe away an investment instantly. Insurance removes that danger from the equation, thus making development more palatable.

Incentivizing Business Development

Governments can expand the availability of insurance beyond what the private sector would ordinarily offer by offering additional protections against loss. For example, a public-private partnership spearheaded by the federal government offered insurance that encouraged investments in areas that faced the threat of terrorism after the September 11 attacks. In areas where insurance companies might otherwise be skittish about covering, such as a crime-ridden part of town, government policies and incentives can help provide that protection.

Financial Effects

Insurance can help encourage investment by promoting financial stability and mobilizing savings. The concentration of income from customers purchasing life insurance policies, for example, provides capital that can be invested elsewhere in the economy by the company for greater returns. Individuals know that FDIC insurance means their bank deposits are safe, thus encouraging them to place money into financial institutions that can then use their funds to make new loans.

Safety Net

Personal and social insurance policies also can help economic development by helping workers stay healthy, keeping them afloat between jobs and getting them ready for a more appropriate assignment. With health insurance, for example, workers are encouraged to see doctors, get treatment for injuries or illnesses and avoid the burden that a catastrophic medical emergency might otherwise have on their finances. Unemployment and workers’ compensation coverage allows people to survive a temporary job loss and stay solvent while they look for work, keeping them available for those looking to hire new workers to develop their business.

Photo Credits

  • ColorBlind Images/Blend Images/Getty Images
bibliography-icon icon for annotation tool Cite this Article