From the macro side, according to the Insurance Council of Australia, the insurance market effectively and efficiently is a fundamental tool for an advanced economy. Through the general insurance industry, the economy and economic agents can transfer and provide price risk, enabling them to better allocate resources thereby contributing to the growth / higher investment and living standards are also higher. As the driver of the economy, general insurance contributes directly to economic growth by:
- Assess the risks and risky activities
- Improve resource allocation in the economy
- Reduce transaction costs between the parties when they want to move the risk from risk-sensitive to those who are willing to bear
- Support economic development by facilitating the investment at a higher risk than what can be borne without the presence of market risk
- Invest the funds of insurance premium to deepen the reach of capital available for investment purposes
- Reducing the burden of government / public sector in the event of damage or a severe natural disaster, thus also strengthening public financial management
- Supporting the realization of the principle of mutual obligations and personal responsibility in individuals and communities to protect from loss and damage
- Reducing losses in the wider community through a strategy of minimizing risk
Explanation of the macroeconomic functions of insurance can be seen from the five main viewpoints which transfer risk, a risk-based assessment, to encourage legal redress, the investment function of insurance companies, and advice on risk management functions.
In terms of risk transfer, insurance providers to provide security for individuals and companies and allow them to take risky activity. In general insurance, a person does not need to keep their funds in current savings to guard against risk.
In an effort to risk assessment, insurance companies determine premium rates that reflect possible losses, which is calculated by performing a direct calculation based on the collection of similar risks or by linking premiums to claims experience that never happened before. If the premium reflects the risk faced by the company correctly, then there is an incentive to reduce the risk as this will reduce the premium payable. When insurance prices increase, individuals and firms face strong incentives to improve its behavior. For example: Smokers and the affected street racer vehicle insurance are required to have to improve its behavior so as not exposed to a larger premium. This would also provide a beneficial impact on the overall economy.
