Insurance is one of the main and important fields of the economy. The main aim of insurance is to protect people from risks and from dangers. As we know, in the modern period there are too many accidents, bad events and unexpected dangers. These risks can happen every time in social life. As an economic category, insurance, which is part of the financial system, is the foundation and utilisation process of the targeted finance funds, generated from the payment of premiums, established to eliminate the damage from sudden accidents and emergencies and to provide financial support to the citizens in the accidents connected with their private lives.
Another main role of insurance is that it encourages people’s savings. Normal life insurance is a good example of this process. Life insurance increases people’s savings due to the payment of a regular premium and it provides a regime of investment. It develops a habit of saving money by paying the premium. Consequently, the insured gets the lump sum amount at the maturity of the contract. Thus life insurance encourages savings.
The insurance sector is susceptible to systemic risks generated in other parts of the financial sector. For most classes of insurance, however, there is little evidence of insurance either generating or amplifying systemic risk, within the financial system itself or in the real economy. Insurance always protects people from loss, from danger. Many people know that danger can occur every time. For this reason, a person who wishes to insure his property will pay a regular insurance premium to the insurance company. In this manner, the property is guaranteed by the insurance company. Whenever a loss occurs, it is compensated out of the funds of the insurer. With this process, insurance spreads risk in life. In addition to eliminating risk for the individual through transfer, the insurance device reduces the aggregate amount of risk in the economy by substituting certain costs for uncertain losses.
The Insurance sector plays a great role in increasing the gross domestic product. All premiums collected by insurance companies affect economic development positively. Besides that, insurance affects the balance of payments and financial stability, and it also increases employment opportunities. These factors also accelerate economic growth. It is for this reason that the insurance industry is an important pillar of the Maltese economy, taking advantage of a number of key attributes that Malta offers – including a highly-skilled workforce, excellent service, appropriate corporate infrastructure and robust legislative and regulatory frameworks emanating from the Insurance Business Act, including tax efficiency and innovative structures.
The importance of the insurance sector is growing due to an increasing share of the aggregate financial sector in our country. Insurance includes the services of providing life insurance and annuities, non-life insurance, reinsurance, freight insurance, pension schemes, standardised guarantee schemes and auxiliary services within the insurance sector. Insurance companies, together with mutual and pension funds, are one of the biggest institutional investors in the stock, bond and real estate markets and their possible impact on economic development will rather grow than decline due to issues such as ageing societies, widening income disparity and globalisation. Insurance also affects the balance of payments of the country positively. For example, when one insurance company insures large-scale risk, this company transfers some part of the risk to another insurance company. This is referred to as the reinsurance process. The main advantage, of particular appeal to companies intending to write business across the EU, is that insurance companies incorporated in Malta can passport directly, through the freedom of establishment or services, to all other member states.
The insurance sector plays an important role in the financial services industry, contributing to economic growth, efficient resource allocation, reduction of transaction costs, creation of liquidity, facilitation of economics of scale in investment and spread of financial assets. Insurance also helps to develop the services, agriculture and industry sectors of the economy. With these advantages, insurance also affects economic growth positively. While insurance, like other financial services, has grown in quantitative importance as part of the general development of financial institutions, it also has become qualitatively more important due to the increase of risks and uncertainties in our society. Insuring risks in a modern economy is a multi-dimensional undertaking. It is a complex business that interacts with many aspects of our lives. The importance of the insurance industry for an economy can only in part be measured by the sheer size of its business, the number of its employees in a given country, the assets under management or its contribution to the national GDP.
It is with this background that one is utterly disappointed with the incomprehensible attitude taken by the government and responsible authorities with respect to the frequent suggestions and proposals of the Malta Insurance Association aimed at improving the effectiveness and certainty of the insurance sector. In this sense, the Director-General, Adrian Galea, has been a prominent spokesman whose pleas have been going unheeded. It was the MIA that highlighted the fragmentation of the fire safety legislation, warned against the “exceptions” to the penalty point system, backed calls for “jaywalking” to be made illegal, called for uniformity and consistency by our judiciary in the liquidation of damages and called for the immediate and forceful action on electric scooters.
Malta is considered to be an attractive location in the EU for the establishment of captive and other insurance and reinsurance businesses. Now that we have managed to overcome the FATF’s greylisting, the island will continue to offer stability to potential investors. Insurers are grappling with the tough new business, regulatory and investment environments that are emerging from the financial crisis. The insurance industry also faces broader challenges, demographic shifts, the rise in power of emerging markets and changing customer behaviour. As a major stakeholder in Malta’s economy, the MIA should undoubtedly be more involved and listened to in sectors that directly or indirectly affect its performance and role.
Dr Mark Said is an advocate