It is safe to point out that life insurance has historically been an important method through which individuals have been able to save and invest effectively for the longer term. By designing life insurance products, underwriters have been able to accumulate large amounts of money from across a large proportion of the population.
By pooling these savings from investors into large accumulations of investable funds, insurance companies have been able to invest in a wider range of investments than individuals would have been able to invest directly themselves. They have also been able to invest in larger scale and more risky investment opportunities which tend to be more beneficial to the economy.
In addition, because in life insurance there is a regular or contractual nature to the payment of premiums by consumers, the level and stability of personal saving is increased, compared to what would be the case if the payment system is more unrestricted. This contractual nature of the premium payment system in life insurance has been reinforced by insurance companies developing good marketing strategies in order to encourage individuals to save.
There is no shadow of doubt that the efforts made by insurance companies in crafting effective selling tactics, despite the occasional criticisms of pressure selling, have played a key role in the growth of the life insurance business, and consequently stimulated the level of long term saving within the economy as a whole.
It is through the investment of the premiums paid by policyholders that the transmission of saving is fed through into the wider economy. The mechanism through which this transmission takes place is the capital market. The range of investments in which an insurance company can invest its funds within a given economy will depend of the degree of development of the local capital market.
Savings mobilized and invested in the capital market by life insurance companies clearly acts as an important stimulus to the growth of the capital market itself. However the relationship between the level of saving generated through life insurance and the development of a domestic capital market is a two-way process. This is because life insurance usually involves a voluntary decision to save on the part of customers. Customers will not wish to save through these contracts if the investment opportunities that are available to insurance companies in the capital market are not attractive.
There are a number of benefits as a result of a dynamic life insurance sector. Firstly, these savings can be made available, either in the form of equity or debt capital, to manufacturing, agricultural, energy, service enterprises etc in the private sector. New businesses/companies can be set up and finance is available for existing companies to increase their level of capital expenditure in new plant, equipment etc.
Moreover, particularly for life insurance, since the time horizons for investment are long-term, these savings can be tied up for a long duration of time and hence can be made available for capital expenditure decisions that only will produce profits in the future. This investment activity of life insurance complements the lending practices of the banking system, since banks can only provide short-term finance because of the short-term nature of their deposits. Hence there is a dynamic interaction process at work, with the development of saving through life insurance and the development of the capital market both evolving together, with one assisting the other.
Secondly, these long-term savings generated through life insurance can also be made available to the public sector especially through the government. They can enable the government to fund infrastructure projects which are vital for emerging economies, not only to underpin the growth of domestic private sector companies but also encourage foreign direct investment to enter the local economy.
In addition, these capital expenditure decisions, both by the private sector and the government, should lead to increase in the level of employment and an improvement in the standard of living across the economy. Moreover, as the productive base of the nation increases, the export potential of the country also increases, as well as allowing the country to supply more of the goods that it currently imports from abroad. Not only is the balance of payments and foreign exchange holdings improved, but the domestic exchange rate is also strengthened.
Thirdly, inspiration of greater saving also has short-term benefits. If individuals can be persuaded to save more, then by definition they will be consuming less. This reduced consumption will help to lower any inflationary pressures that might exist within the economy.
In addition, there is a wider psychological advantage from encouraging the growth of domestic saving within the country. This is because when the country generates its own domestic saving it is less reliant on inward foreign investment. If domestic saving is too little, then the ownership of the economy will gradually tend, directly or indirectly, to fall more and more under foreign control.
Undoubtedly, a balance needs to be struck between the level of domestic and foreign ownership within the country. This is a level which will depend on the political inclinations and indeed on the psychology of the nation itself. But it should be noted that foreign manufacturing and commercial companies investing in a country such as Kenya would like to see the existence of a well-developed capital market, since they themselves will wish over time to raise capital to help finance the future growth of their local operations.
Experience shows that life insurance markets tend to take time to develop, often developing later than banks and non-life insurance companies. This reflects the fact that as long term savings across the population increases as standards of living rise and as standards of living rise, longevity also increases.
It is difficult to generalize on how life insurance products change and widen in scope as the life insurance market matures. There are interchanges of economic, political and cultural and commercial factors at work, which vary from country to country.
Nevertheless, there are two aspects of product development that has been evident in many countries. First, one is that life insurance products tend to move from having a primary emphasis on insurance protection towards a greater savings role, especially saving for retirement purposes. Second, there is a move away from simple products sold either on an individual and group basis to more complex products.
I tend to believe that the government can stimulate the growth of the life insurance sector by encouraging better understanding of personal saving and financial planning through education. This can be done by widening the teaching curricula in our local schools and universities.
The writer is the Chief Executive Officer of Gateway Success Consultancy Ltd.
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