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Originally published in the Indianapolis Star on 1/5/2012

When was the last time that you noticed a ballgame referee when he’s not issuing a penalty?  If never, you’re an average sports fan.

One of America’s leading economic actors bears some resemblance to referees.  The insurance industry exists to protect us from harm and to instill integrity in the free market system thereby vitally protecting capitalism’s most important ingredient:  trust.

Yet, we need to widen the angle view to fully appreciate the role insurance plays in our economy and individual lives.  So let’s begin the New Year by pulling out our old school notes to understand the scientific method that makes insurance possible.

Prior to the 1600s, the concept of fate or intuition played a large role in society.  Events such as a boulder rolling down a hillside were considered cosmic activity rather than natural phenomena to be calculated.  An Italian philosopher, physician and mathematician – see why they called it the Renaissance Period! – named Girolamo Cardano introduced the world to rules of chance.

By this time, insurance had been practiced for almost two thousand years since before the Babylonian Code of Hammurabi protected merchants from loss or theft on the high seas.  But it was the introduction of actuarial tables, which tied mathematical “chances” to behavioral “probability” that gave rise to sophisticated insurance practice.

Such math gave rise to one of my favorite phrases in the financial services industry:  the law of large numbers.  It sounds like a kids’ game but its simplicity has profound impact on our $15 trillion economy.  Simply put, group insurance gets cheaper as the group gets larger.

Consider the contrast between Social Security and life insurance.  Social Security takes from all wage earners thereby causing teenagers to look at their first paycheck and say, “Who is FICA and why is he taking my money?”  It is then supposed to be paid out uniformly.  However, unpredictable events such as early loss of life and political events such as using the funds for other purposes make the system unfair and unreliable.

Life insurance on the other hand is fair for both inputs and outputs.  Each person’s lifetime earning power can be calculated, and recalculated over the years, and financial products are tailored to sustain the deceased worker’s monetary value to surviving family members upon death.  Again, the law of large numbers helps us out since group life insurance spreads the risk among many other contributors to the fund.  It is unchanging math and rational markets rather than capricious politics that guarantees fairness.

So that’s it for our history, math and science notes.  Now we turn the page to economics and find that the insurance industry produces 2.3 million workers nationally.  The employees’ average weekly earnings of $900 far outpaces the private sector average of $600 per week.

Indiana’s insurance industry is especially powerful.  With so much attention paid to life sciences, hospitality and IT, insurance could be considered the overlooked economic cluster. Its workforce swells past 60,000, three of Indiana’s largest companies are insurance carriers and the state is ranked as one of the best commercial markets in the nation.

State leaders are actively nurturing this strength.  Indiana State University has been recognized as one of the top three undergraduate insurance programs among US colleges and insurance training is being introduced at the high school level as a feeder to ISU and Ball State’s insurance program majors.

Indiana’s insurance industry leaders stand among the city’s titans.  Indianapolis Life reinvigorated the Fairbanks mansion and its Near North neighborhood and College Life built the Pyramids office complex.  John Burkhart used his insurance-generated wealth to found the Indianapolis Business Journal among other causes.  His partner’s son, Marty Moore, is among the city’s most strategic philanthropists.  It was his seed grant that helped launch Indiana University’s renowned health program in Kenya.

AUL, now OneAmerica, has been a force behind Indianapolis’ downtown revitalization.  Under Jerry Semler and Dayton Molendorp’s leadership, the company remains true to the corporate ethic that helped Indianapolis become a world-class city.  They grow profits with a conservative business strategy and translate their wealth into sound investments in the community’s well-being.

With the national economy struggling to recover, citizens should be encouraged by the insurance industry’s competitiveness.  Only 3% of its employees are unionized and bullish long term growth is predicted as the baby boom generation grows older.  Our TV’s regularly feature the Alflac duck, Progressive’s Flo or Geico’s Gecko.  It is better to think of the role insurance played in building the modern economy, the jobs it continues to create today and the personal wealth enabled thanks to this unsung economic hero.