The functions of insurance may be categorized as below :
I. Primary Functions
II. Secondary Functions
III. Other Functions
I. Primary Functions
The primary functions of insurance include the following :
1. Provide protection : The primary purpose of insurance is to provide protection against future risk, accidents, and uncertainty. Insurance cannot check the happending of the risk, but can certainly provide for the losses of risk. Professor Hopkins observes, “Insurance is a protection against economic loss by sharing the risk with others.” He further add “Insurance is the protection against economic loss.”
2. Collective bearing of risk : Insurance is a device to share the financial loss of few among many others. Dinsdale opines, insurance is a mean by which few losses are shares among longer people. Similarly, William Bevridge observes, “The collective bearing of risks is insurance.” All the insureds contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid. Similarly, Rigel and Miller observe, “Insurance is a device whereby the uncertain risk may be made more certain.”
3. Evaluation of risk : Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.
4. Provide certainty against risk : Insurance is a device which helps to change from uncertainty to certainty. This may the reason that John Magee writes that the function of insurance is to provide certainty. Similarly, Riegel and Miller observe, “The function of insurance is primarily to decrease the uncertainty of events.”
5. Spreading risks : Professor Thomas has correctly written that “Insurance is the device for spreading or distributing risks.”
II. Secondary Functions
1. Prevention of losses : Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insureds. The Loss Prevention Association of India formed by the insurers, alerts the people about future risks and uncertainties through publicity measures.
2. Small capital to cover larger risks : Dinsdale observes, insurance relives the businessmen and others from security investments, by paying small amount of premium against larger risk and uncertainty. There is no need for them to invest separately for security purpose and this money can be invested in other activities.
3. Contributes towards the development of larger enterprises : Insurance provides development opportunity to those larger enterprises having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
III. Other Functions
There are indirect functions of insurance which benefit the economy indirectly. Some of such functions are :
1. Means of savings and investment : Insurance serves as savings and investment. Insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insureds. For the purpose of availing income-tax exemptions also, people invest in insurance. In the words of Magee “Although investment is not the primary function of insurance. Investment service is proved to be an important benefit of insurance. : 8 :
2. Source of earning foreign exchange : Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies.
3. Promotes exports : Insurance makes the foreign trade risk free through different types of policies issued under marine insurance cover. In case of loss of cargo and others due to marine perils the insurance company makes good the loss.
4. Provides social security : Through various social protection plans, the insurance provides social security to people. It not only provide security at the time of death but also provides assistance to the insureds at the time of sickness, old age, maternity etc.
PRE-REQUISITES FOR THE SUCCESS OF INSURANCE
For the successful operations of insurance, certain important factors or requisites are very essential. These are :
1. Presence of a large number of risks.
2. More risks in the life or property of a person so that he may feel necessary to be insured.
3. Probability of real loss on account of risk.
4. Presence of a large umber of people exposed with the same nature and kind of risks.
5. Involvement of loss from the risk must be large enough.
6. The loss from the expected risk should be determinable in advance.
7. The happening of loss/event must be beyond the control of the insured.
8. The loss to all the insureds should not take place at a time. Otherwise, the insurer may face problem in discharging all the claims at a time.
9. The cost of insurance should be feasible. In other words, the premium rates should be reasonable so that large number of people can opt for insurance as a device against risk. : 9 :
10. The risk insurable should be such to become easier to calculate the actual loss.
I. Primary Functions
II. Secondary Functions
III. Other Functions
I. Primary Functions
The primary functions of insurance include the following :
1. Provide protection : The primary purpose of insurance is to provide protection against future risk, accidents, and uncertainty. Insurance cannot check the happending of the risk, but can certainly provide for the losses of risk. Professor Hopkins observes, “Insurance is a protection against economic loss by sharing the risk with others.” He further add “Insurance is the protection against economic loss.”
2. Collective bearing of risk : Insurance is a device to share the financial loss of few among many others. Dinsdale opines, insurance is a mean by which few losses are shares among longer people. Similarly, William Bevridge observes, “The collective bearing of risks is insurance.” All the insureds contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid. Similarly, Rigel and Miller observe, “Insurance is a device whereby the uncertain risk may be made more certain.”
3. Evaluation of risk : Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.
4. Provide certainty against risk : Insurance is a device which helps to change from uncertainty to certainty. This may the reason that John Magee writes that the function of insurance is to provide certainty. Similarly, Riegel and Miller observe, “The function of insurance is primarily to decrease the uncertainty of events.”
5. Spreading risks : Professor Thomas has correctly written that “Insurance is the device for spreading or distributing risks.”
II. Secondary Functions
1. Prevention of losses : Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insureds. The Loss Prevention Association of India formed by the insurers, alerts the people about future risks and uncertainties through publicity measures.
2. Small capital to cover larger risks : Dinsdale observes, insurance relives the businessmen and others from security investments, by paying small amount of premium against larger risk and uncertainty. There is no need for them to invest separately for security purpose and this money can be invested in other activities.
3. Contributes towards the development of larger enterprises : Insurance provides development opportunity to those larger enterprises having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
III. Other Functions
There are indirect functions of insurance which benefit the economy indirectly. Some of such functions are :
1. Means of savings and investment : Insurance serves as savings and investment. Insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insureds. For the purpose of availing income-tax exemptions also, people invest in insurance. In the words of Magee “Although investment is not the primary function of insurance. Investment service is proved to be an important benefit of insurance. : 8 :
2. Source of earning foreign exchange : Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies.
3. Promotes exports : Insurance makes the foreign trade risk free through different types of policies issued under marine insurance cover. In case of loss of cargo and others due to marine perils the insurance company makes good the loss.
4. Provides social security : Through various social protection plans, the insurance provides social security to people. It not only provide security at the time of death but also provides assistance to the insureds at the time of sickness, old age, maternity etc.
PRE-REQUISITES FOR THE SUCCESS OF INSURANCE
For the successful operations of insurance, certain important factors or requisites are very essential. These are :
1. Presence of a large number of risks.
2. More risks in the life or property of a person so that he may feel necessary to be insured.
3. Probability of real loss on account of risk.
4. Presence of a large umber of people exposed with the same nature and kind of risks.
5. Involvement of loss from the risk must be large enough.
6. The loss from the expected risk should be determinable in advance.
7. The happening of loss/event must be beyond the control of the insured.
8. The loss to all the insureds should not take place at a time. Otherwise, the insurer may face problem in discharging all the claims at a time.
9. The cost of insurance should be feasible. In other words, the premium rates should be reasonable so that large number of people can opt for insurance as a device against risk. : 9 :
10. The risk insurable should be such to become easier to calculate the actual loss.
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