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Economic role of insurance
08 Jan 2023 (210 views)  


1. Insurance is not gambling, as there is an economic loss that needs to be compensated.

2. For insurance to work properly and fairly, the following pre-requisites have to be observed:

a) the coverage has to be clearly defined
b) the past statistics of losses have to be available
c) the premium should be computed fairly with a margin to cover expenses and profit.

A well designed insurance scheme is beneficial to the community. It helps to protect economic losses and imposes a fair charge. It also creates employment. 

Insurance can be badly designed under the following circumstances
a) The coverage is vague and leads to disputes over what is covered or not
b) There are no past statistics of losses, leading to speculation by the insurer 
c) The premiums are excessive high to make big profit for the insurer.
d) The insurer employs agents who misrepresent the coverage in their eagerness to earn a commission on the sale.

3. A badly designed insurance scheme imposes a high cost to the community and creates jobs for people who carry out unproductive work, i.e. sell insurance that are not valuable or handles disputes that should have been avoided. 

4. To ensure that the insurance schemes are useful, the government authority has to perform a important role:

a) They have to agree with the insurance companies on a few standard insurance policies that are offered to the public. 
b) The coverage of these standard policies are clearly defined to avoid disputes due to ambiguity. 
c) The insurers have to offer some or all of these standard policies to the public
d) The loss statistics have to be available to determine the expected losses. 
e) The premium should not exceed 50% of the expected losses. 
f) If the insurer wishes to customize their own policy, it has to go through a rigorous scrutiny by the authority and the policy has to be labeled as "non-standard"

Tan Kin Lian


Economic role of insurance
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1. Insurance is not gambling, as there is an economic loss that needs to be compensated.

2. For insurance to work properly and fairly, the following pre-requisites have to be observed:

a) the coverage has to be clearly defined
b) the past statistics of losses have to be available
c) the premium should be computed fairly with a margin to cover expenses and profit.

A well designed insurance scheme is beneficial to the community. It helps to protect economic losses and imposes a fair charge. It also creates employment. 

Insurance can be badly designed under the following circumstances
a) The coverage is vague and leads to disputes over what is covered or not
b) There are no past statistics of losses, leading to speculation by the insurer 
c) The premiums are excessive high to make big profit for the insurer.
d) The insurer employs agents who misrepresent the coverage in their eagerness to earn a commission on the sale.

3. A badly designed insurance scheme imposes a high cost to the community and creates jobs for people who carry out unproductive work, i.e. sell insurance that are not valuable or handles disputes that should have been avoided. 

4. To ensure that the insurance schemes are useful, the government authority has to perform a important role:

a) They have to agree with the insurance companies on a few standard insurance policies that are offered to the public. 
b) The coverage of these standard policies are clearly defined to avoid disputes due to ambiguity. 
c) The insurers have to offer some or all of these standard policies to the public
d) The loss statistics have to be available to determine the expected losses. 
e) The premium should not exceed 50% of the expected losses. 
f) If the insurer wishes to customize their own policy, it has to go through a rigorous scrutiny by the authority and the policy has to be labeled as "non-standard"

Tan Kin Lian