In the developed countries and the world economy as a whole, the insurance industry has two main functions. First, it offers protection against a variety of risks and, secondly, is the source of savings and investment (including long-term) at the expense of insurance reserves, accumulated by insurance companies. Insurance accompanies all important economic processes and transactions, provides stability, continuity, and survival of the business, its reproduction. The main indicator of the extent and level of development of the insurance industry is the absolute volume of insurance contributions (or premiums, paid by the policyholder in exchange for insurance protection) and their per capita level.
Globally, the figure in 2004 amounted to 3200 billion dollars, of which the United States had 960 billion US dollars, while the EU countries have 1124 billion US dollars.
The insurance business is cyclical, when in some years, the insurers pay out huge amounts of refunds, which sharply deviated from the average level, whether in connection with the terrorist attack on New York in September 2001, the devastating floods and tsunamis in 2004 and 2005. Hurricane Katrina, which actually effaced the whole city, was particularly memorable while the property of most of its residents were insured. The insurers’ financial situation also largely depends on the fluctuations of the stock market because insurers allocate temporarily free funds in securities listed on stock exchanges.
The insurance has to deal with unforeseen events and losses that, on the one hand, encourage legal and physical persons to be insured, on the other hand, cause the major costs of compensation for losses and damages to the insured.
The insurance business like no other is by nature international. Suffice it to say that the World Trade Center towers were insured and reinsured by more than 30 international companies, which paid 50 billion US dollars for the damage. However, the insurers continuously have to deal not only with natural disasters and man-made disasters, but also with not as destructive, but much more massive insurance claims.
So, for Europe 2002 was marked by prolonged torrential rains and the strongest floods, summer, 2003 had a record drought, causing multi-billion damages to residents of this densely populated continent, which, because of the deep-rooted cultural and economic expediency of insurance always insure their property interests and property, as well as life and health.
The insurance allows companies and households to compensate for their losses, avoid financial ruin and continue to operate, despite any adverse incidents. In theory, the insurer may go broke if there will be a large number of insurance cases as a result of the impact of epidemics, disasters, or the accumulation of risks within a particular geographic location. To avoid this, the insurer’s insurance portfolio should be diversified and composed of insurance contracts (i.e. the risks taken by the insurer) of different properties and different validity period.
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