Question

Describe how the insurance market works. Explain why this market may have no equilibrium?

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Answer 1

Insurance is generally meant for the future security of individuals. Insurance market basically works from the works of the agents whose main duties are to bring more and more clients to their respective insurance companies. Insurance companies are of two sectors: life insurance and medical insurance. These companies collect premium from their clients yearly and the premium amount depends on the insured amount. Besides, the premium amount also changes with age. Clients of higher age group are required to pay higher premium. Bringing more and more clients is the chief responsibility of the agents which is the most difficult job in the line of marketing. And to encourage the agents, some insurance companies pay commission to their agents. To be in equilibrium, every market needs to have demand for and supply of its product. Insurance market however can have no equilibrium. For its demand, there is scarcity of clients as ln the current times, major portion of the population are employees. These employees get insurance from their respective companies especially the IT Companies, where a significant part of the population works especially in developed countries like US. Very little part of the population may be interested in Life Insurance, especially the wealthy section of the public. For the supply of insurance, there is basically scarcity of agents as in the current times, very few or no portion of the public wishes to join and work in this line. As there is neither much demand nor much supply, the insurance market will never or rarely be in equilibrium. This description of insurance market is with reference to Indian market. Insurance market may have different rules in different countries depending on its position in those countries.