With Yinka Bolarinwa

Firms exposed to various risks of their liability, property illness and disability of their employ ees and life of key employees, have possibility of managing those risks and transfer to insurance companies.

Insurance increases marginal productivity of capital also in a way that it makes no need for high-liquidity contingency funds of firms that results in more funds available for financing high-return projects.

Without insurance coverage large contingency funds would be needed to protect firms against risk. It would be particularly hard for small and medium size firms whose access to financing in the case of adverse events is very limited.

Increasing availability of funds could result from kind of insurance products by which insurance companies provide protection from credit risk to other financial intermediaries. In that way financial intermediaries are more willing to lend funds for financing real investments what encourage economic growth.

Positive effect on economic growth through more efficient allocation of resources could be realized by relieving the burden of social welfare system.

It is particularly important in the new demographic situation of prolongation of life expectancy, an increase in elderly people and a falling birth-rate while at the same time people expect to receive a high level of healthcare and pensions.

It makes big pressure on social security system and could have negative effect on economic growth. But, private insurers could give their contribution in solving problem of social security system.

They provide protection from the financial consequence of illness and injury, unemployment and retirement. Thus, insurance products such as life, health and payment protection insurance, can substitute for government security programmes.

In the process of making decision on underwriting risk insurance companies gather relevant information on risk factor and assess risk. Insurers’ risk assessment is reflected in price and policy conditions.

By providing insurance to firms about which they have special knowledge, insurers can signal their informed status. In this way, they offer firms an indicator of their risk level. This influences their decisions on investment projects and contributes to more efficiently allocation of their resources.

Another importance of insurance companies to economic growth is their role in gathering and analyzing information on borrowers. In other words, insurance companies contribute to more efficient allocation of capital by lowering information asymmetry.

Individual savers do not have time, resources and ability to gather and analyze information on borrowers, which might result in problem of adverse selection or even in their unwillingness to lend their funds.

Also, insurance companies could contribute to economic growth by realization of fourth function of financial system, facilitation of exchange. However, insurers do not facilitate exchange of goods and services.

Finally, as we have seen, insurance development promotes economic growth. Thus, functions of insurance companies providing means of risk management and performing mobilization and allocation of resources are important for economic growth.

These can be seen in terms of life and non-life insurance, as well as total insurance, even after controlling for other determinants of economic growth and endogeneity.