Insurance as a Form of Social Safety Net

Abstract

Insurance has served its role as an arbitrator and mitigator of risk in modern society. From life insurance to healthcare insurance, each form of insurance has contributed to welfare in society in its own way, helping to mitigate risk and providing a form of prepaid social safety net in varied incarnations across the world. Depending on the diversity of insurance products in a society, the social safety net provided by insurance may be even more substantial than that provided by conventional social programmes from the state. Take, for example, an insurance product centred on mitigating the risk of heavy rainfall on lost revenue from restaurants. From the phenological perspective, days with rainfall is typically correlated with significantly smaller crowd at eateries and restaurants as patrons stay at home and avoid eateries on rainy days. This then led to lower revenue. If the heavy rainfall persists and stretches for days, eateries and restaurants surviving on daily revenue to pay bills may encounter cash flow problems. Such a scenario presents a risk to the eateries, and needs to be mitigated. Imagine the promulgation in the market of a new insurance product that could help the store owners tide over the difficult times by mitigating the risk of lost revenue during rainy days. This could come in the form of insurance scheme that pays out 50% of the lost revenue in the event of more than 24 hours of continuous rain of varied intensity. Subscribers to the insurance product would pay the monthly premiums, which can be construed as a form of co-pay or savings which pools together a fund to help tide them over during difficult times. Naturally, the underwriters of the insurance stand to make an economic gain in this transaction, but the insurance product also serves a useful and important social and economic function in mitigating risk of lost revenue and potential credit crises during periods of prolonged heavy rain. Such mitigation strategies are not typically available from city councils or governments as they do not concern heavy storms or prolonged extreme weather events. Viewed from another angle, insurance schemes such as the one presented above fill in gaps in the social safety net of society, and makes the business environment more benign, and more forgiving to business. Naturally, insurance products need to be well-crafted and do not promote risky behaviour on the part of businesses or individuals. Overall, insurance products do serve as a form of social safety net, where the insured prepay or save in a common fund which dishes out payouts to help the insured tide over difficult times.

Keywords: insurance products, social safety net, mitigator of risk, lost revenue, payouts