Insurance activates otherwise-idle resources for socially productive purposes. People need houses. Banks have money. The risk that a house will burn d

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2024-10-25 16:30:26

Insurance activates otherwise-idle resources for socially productive purposes. People need houses. Banks have money. The risk that a house will burn down & leave the bank with a loss, though, rationally prevents banks from lending.

Home-owner’s insurance comes along & transforms risk into opportunity. Now the bank’s risk of loss disappears. The bank writes the loan. People get a house. Contractors get work. The bank locks in a profit. Society benefits. (There are benefits to the policy holder too, but that’s not today’s topic.)

Try a more personal case—an entrepreneur who happens to be a cancer survivor. They have an idea that could create social value. The bank has money to lend. The bank, though, responsibly takes into account the increased risk that the entrepreneur will die during the term of the loan & leave the bank with a loss.

Again, insurance transforms risk into opportunity. By taking out a life insurance policy with the bank as the beneficiary, the bank can now lend, the entrepreneur can start their business, society benefits.