The services sector of the global economy has become more vibrant due to globalization and advancement in the information technology (Barkur, Varambally, & Rodrigues, 2007). Furthermore, in term of world’ economy, services sector is the largest, as well as, the fastest growing sector (Ahmed & Ahsan, 2011). According to the world bank (2015), services sector contributed about 69 percent towards total world’s Gross Domestic Products (GDP). Within the services sector, the services provided by insurance sector are linked to the overall economic development of a country (Ahmed, Ahmed, & Usman, 2011) and sophisticated insurance sector promotes investment and trade (Baur, Birkmaier, & Rustmann, 2001).
For example, insurance companies help other companies to reduce investment risk. If a company do not have insurance protection, it is very difficult for the company to raise capital. On the other side, insured companies reduce their cost of raising capital by having insurance protection. Specially, in the emerging economies, shortage of capital is one of the major issue which companies face in their investment decisions. Therefore, insurance companies help such companies by reducing their investment cost. The importance of insurance is also linked to infrastructure investment. Big infrastructure projects such as airports, railways and power plants are difficult to survive without the help of insurance. This is due to the unavailability of funds which can cover the losses for such projects if unexpected event occurred (Baur et al., 2001).
Insurance companies are also major players in the financial system (Malik, 2011). They act as a risk buffer and provide support to the overall business environment. Insurance companies, as a financial institution, provide aid to overall financial system in two ways. First, they are a source of transferring the risk from insured person to insurer. Second, they play a role of financial intermediary by connecting the borrowers and savers (Asghar & Afza, 2010a). In addition, insurance companies also provide stability to the overall functioning of stock market through the large number of investment made in stock market by insurance companies (Baur et al., 2001).
In Pakistan, the form of investment made by insurance companies are mainly in securities which traded in the stock exchanges. Evidently, the total investment in securities and properties was recorded about 70 percent of the insurance companies’ total assets (State Bank of Pakistan, 2014). Insurance sector plays an important role in the economic development of any country (Emamgholipour, Arab, & Mohajerzadeh, 2017). Moreover, its contribution towards overall business environment is highly imperative. Without insurance, businesses must maintain high level of liquidity which results in higher cost and less availability for investment (Asghar & Afza, 2010b).
For example, companies will never have the opportunities to invest in new production facilities or companies if the risk of losses is place on their part (Baur et al., 2001). Furthermore, the discontinuity of the insurance operation will affect the overall sector of the economy, as other businesses are facing higher level of risk (Ahmed, Ahmed, & Ahmed, 2010). That is why, due to utmost importance of insurance sector, the availability of insurance is sometimes considered as factor of production (Baur et al., 2001). Insurance companies also provide support to the overall economy by playing a role as information provider. Insurance companies’ premiums level serve as an indicator for existing level of risk and probability of loss. Furthermore, insurance companies also provide advisory and consultancy services to improve the quality and safety of product and services (Baur et al., 2001).
Ali Burhan Khan PhD. Scholar, School of Economics, Finance and Banking University Utara Malaysia, Malaysia Dr. Zaemah bt. Zainuddin Senior Lecturer, School of Economics, Finance and Banking University Utara Malaysia, Malaysia Dr. Diara Md. Jadi Senior Lecturer, School of Economics, Finance and Banking University Utara Malaysia, Malaysia
0 Comments