Principles of Risk Management and Insurance, 13th Edition

Costs of Insurance to Society

Although the insurance industry provides enormous social and economic benefits to society, the social costs of insurance must also be recognized. The major social costs of insurance include the following:

• Cost of doing business

• Fraudulent claims

• Inflated claims

Cost of Doing Business

One important cost is the cost of doing business. Insurers consume scarce economic resources—land, labor, capital, and business enterprise—in providing insurance to society. In financial terms, an expense loading must be added to the pure premium to cover the expenses incurred by insurance companies in their daily operations. An expense loading is the amount needed to pay all expenses, including underwriting and loss-adjustment expenses, ...