A Cost And Benefit Analysis Of Insurance For Society As A Whole

A Cost And Benefit Analysis Of Insurance For Society As A Whole

Insurance was introduced to cast a safety net for society. It helps the insured, especially the poor to prepare for rainy days and reduce the risk for each individual by distributing it among the larger pool of community. Nowadays, many modern societies including the United States, China and Singapore have made certain insurance mandatory for their people. The concept of insurance is taught in economics tuition under the topic of asymmetric information. Economics Cafe Learning Centre is a reputable economics tuition centre in Singapore that specializes in ‘A’ level economics tuition. The Principal economics tutor is Mr Edmund Quek.

The Benefits Of Insurance

Most people recognise the importance of insurance for its following benefits:

  1. Security against risk and uncertainty
  2. Through payment of insurance premium, which is a regular contribution of a relatively small amount, the insured are exempted from the risk and uncertainty of paying a much larger one-time lump sum throughout the insurance period. Please approach your economics tutor for an explanation of why the insurance benefit the poor more than the rich. This can be an interesting case study in economics tuition.
  3. Social Stability
  4. Insurance also serves as an effective tool to ensure social stability. The pension scheme in the United States and China give regular payouts to their people after they have reached the stipulated retirement age. In Singapore, pension takes the form of Central Provident Fund (CPF). Singaporeans and Permanent Residents of Singapore are required to contribute a certain percentage of their income to CPF, together with their employer’s share. Upon retirement, the fund will be used to provide for their retirement life. This ensures that the retired are taken care of and hence reduce the risk of social instability and financial burden to the government. Your economics tutor will cover the topic of government spending in economics tuition. Please consult your economics tutor for some of the areas that the governments will direct their funding to.

Costs Of Insurance

The loopholes of insurance have given rise to more and more incidences where the insurance system is abused.

  1. Inflated Bills Which Translate to Increased Total Cost and Higher Premium
  2. Take hospitalisation insurance for example. Insured patients tend to opt for private hospitals and wards of higher class than their uninsured counterparts. The reason is simple. The insured patients are paying the same amount of premium regardless of their medical expenses which will be shared among all insured. Although insurance companies have come up with measures to encourage the insured to choose only what is necessary for them by giving them cash rewards for opting for public hospitals and wards of lower class, these have been proved ineffective or insufficient. As a result, the inflated medical bills have led to increased total cost to the insurance company and hence higher premium to be borne by all the insured. Consult your economics tutor on how inflated medical bill will increase the cost to society or raise this question for discussion in your economics tuition class.
  3. Waste of Public Resources
  4. As for the case of motor insurance, it is reported in the Straits Times that there has been a rise in the number of motor insurance scams this year, wasting public resources in the process of investigation and prosecution to bring these scammers to justice. Please ask your economics tutor for a lecture on efficient allocation of economic resources or bring this up for discussion in your economics tuition class.
  5. In order to claim their insurance, the insured patients have to be hospitalised. This has led to the choice by many insured patients with relatively minor medical problems to stay in the hospital for one night or more resulting in unnecessary waste of public resources.

In conclusion, like a coin has two sides, insurance too, has its costs and benefits. To maximise its benefits and minimise its costs, regulators are under pressure to come up with innovative ideas to plug up the loopholes and put abuse at bay.

Linda Geng

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Principal Economics Tutor: Mr. Edmund Quek