• Topic: The Effect of Insurance on Economic Growth in Ghana
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  • Pages: 76
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  • Chapters 1 to 5
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The Effect of Insurance on Economic Growth in Ghana



This study was intended to evaluate the effect of insurance on economic growth in Ghana. This study was guided by the following objectives; to identify the role insurance play to the economy of Ghana, to access the awareness among the general public about insurance in Ghana, to find out the problems facing the insurer and the insured in Ghana.

The study employed the descriptive and explanatory design; questionnaires in addition to library research were applied in order to collect data. Primary and secondary data sources were used and data was analyzed using the t-test statistical tool at 5% level of significance which was presented in frequency tables and percentage. The respondents under the study were 30employees of Donewell Insurance Company. The study majorly focuses on the role of insurance companies in the economic development of Ghana.

The study findings revealed that the role played by insurance to the organization was the development of trade and the mobilization of fund; based on the findings from the study, efforts should be made to improve insurance in Ghana.




  2.0 Introduction

In this context, literature review is all about people’s opinion about insurance. Other related issues concerning the topic under discussion such as the role of insurance services rendered to the general public by insurance, and problems facing insurance in Nigeria among others will be taken into consideration.

2.1 Definition of Insurance

The term insurance has been defined by various authors and stakeholders.

According to Greene and Trieschman, (1985) insurance is “An economic institution that reduces risk by combining under one management a group of objects so situated that the aggregate accidental losses to which the group is subjected become predictable within narrow limits”.

Insurance can be said to include certain legal contracts under which the insurer, for consideration, promises to reimburse the insured or render services in case of certain described accidental losses suffered during the term of the agreement”.

The definition stresses how the main economic function performed by insurance such as risk reduction is accomplished. The emphasis is on the word “usually” which implies that not all insurance is affected by means of a legal contract.

To the socialist, insurance is a mechanism, modern society use to reduce social impact in financial terms of losses or damages suffered by the victims of accidental misfortunes.

In addition Steven Dracon and Trevor Watkins (1987) defined insurance as “ an agreement by which one party, the insurer promises to pay another party the insured or policy holder, a sum of money if something happens which causes (or has potential to cause) the insured to suffer a financial loss”

From the definition, it means that the adverse effect of the loss on the insured is mitigated to the extent that it is offset by the benefit received from the insurer, thus the primary service provided by the insurer is a guarantee of payment of a valid claims, benefits on the accordance of an accidental loss or event covered by the policy.

Furthermore, the Encyclopedia Britannia sees insurance as “a system under which the insurer, for a consideration usually agrees upon in advance promise to reimburse in the event that certain accidental occurrences resulting in losses during a given period.

From this definition also, it expresses that the primary function of insurance is substitute certainty for uncertainty as regards the economic cost or loss producing event. Usually consideration is paid in advance for an event that may happen in the future.

Again, according to D.J. Anderson, “Insurance is the payment of sum of money by one person to another on the understanding that, in certain specific circumstances, any losses suffered by the first person (the insured) will be made good by the second person (the insurer)”

In a very simple term, insurance may be likened to our indigenous “Ndoboa” of “edusua system” on which all of us lean for support in times of need. By the traditional “edusua” system the burden of the individual ( be it funeral or financial) is shared by all; it is spread between among individual family members so that the burden become lighter upon the shoulders of many rather than weighing heavily on the misfortune provides security for the individual and the community.

Insurance is therefore a ‘pool’. It is a common fund build on the contribution (premiums) of policyholders to give up their home or accept undesired able alternatives such as poster home living with relatives or accepting relief payment. A fire or a liability suit can cause the failure of an organization such as price can be met through insurance which provides indemnification or repayment at the time of the need in order to keep the family or business intact.

Provides Investment Capital: Part of the premiums paid by policy holders are being give out as loans to support investors to start up businesses.

The issue of investment is very critical to the success of businesses. Some insurers invest heavily in both money and capital markets such monies invested by these insurer constitute a major accessible funding source for the long term projects. The invested monies are also accessible to individuals, business entrepreneurs and government to set up and or expand their reparative business and programmes.

Provides a Basis for credit: one finds it impossible to visualize the credit economy of factory without insurance. Several kinds of insurance are invaluable as the foundation for credit transaction. Insurance permit more favorable credit terms to borrowers (that is both individuals and business) to reduces the risk of difficult. Individuals and businesses go for bank loans and use life insurance ( either face value or cash value) as a guarantee that loan will be repaid in spite of uncertain contingencies such as the death or disability of the borrower.

Insurance provides a large reservoir of funds for the private sector government to borrow from that is it reduces the financial burden on the state for caring for the aged and these made financial destitute because of death of a family breadwinner.

Furthermore, at the business levels, insurance is important in the following area: contribution and execution of infrastructure projects take place with insurance to give the necessary financial back – up. Example construction and engineering risk and taken care of through insurance.

Facilitating commerce and industry: No new projects take place without insurance support, and help in export and imports between countries.

The contract of insurance is generally shown by a document which is known as the policy which is signed by the insurer or his/her agent at the full of the policy from which practice, the term underwrites is derived. The consideration for the granting of a policy is a premium paid by the insured, and upon the happening of the event insured against, the insurer must pay to the insured either the indemnity required under the policy or lump sum of the happenings of the specified event. According to Michael G.H. et el in his book contemporary Money, Banking and Financial (1995). However, the story is not different with Africa and for that matter Nigeria since it was brought to our part of the world by the British colonialists trading into West Africa. As in the U.K. therefore, the first role of insurance was to service international trade.

This prompted the government of the days to issue several decrees like the NRC Decree No. 95, NRC Decree No. 130 and so on just to enable Nigeriaian companies capture the commanding heights of the insurance sector. As at January 6, 1996, the number of insurance companies rose to seventeen signifying yet another growth but this time local interest dominated.

The business of the sector was self-regulating as leaders of the industry. They were a small group of middle class practitioners, who share the same culture and ethnics of generation. However, in 1989, the insurance law PNDC Law 227 was passed. Which lead to establishing the national insurance commission (NIC). This was to establish an environment in which the insurance business could be conducted properly and enabled it to grow. This is to formulate policies for the promotion of a sound and efficient insurance sector in the country.

2.2 Historical Development of Insurance

Insurance has existed thousands of years. The business probably began in the cities of Northern Italy about the end of twelve century. This was part of the trading customs of the Italian merchant which in most cases was marine. A form of credit insurance was included in the code of Hammurabi, a collection of Babylonian laws, said to date back the Law of Moses.

To finance their trading of expenditures in the ancient times, ship owners obtained loans from lenders. If a ship is lost, the owners were not responsible for paying back the loans since many ships return safely, the interest paid by numerous ship owners covers the risk to the investors. This is from Rayness, H.E (1976).

It was like–wise in Maritime setting that later one of the world’s most famous. An insurance provider Lloyds of London was born. By 1688, Edward Lloyds was running a coffee house were London merchants and bankers meet informally to do business. There, financiers who offered insurance contract to sea farers wrote their names under the specified amount of risk that they would accept in exchange for a certain payment or premium. These insurers came to be known as under writers in July1969. Lloyds became a formal group of underwrites that in time grow into a foremost insurance market with particular interest in marine risk.


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