FUNCTIONS OF INSURANCE

Insurance may not be able to avoid uncertainties associated with life, in general, and business in particular, but it can diffuse the impact of the occurrence of loss by equitably distributing the loss over a large number of policyholders. For example, in the case of fire insurance, all the. Policyholders pay premiums, but they do not suffer losses caused by fire. Only those who suffer the loss compensate out of the shared pool.

Providing Protection

The primary function of insurance is to protect against the risk of loss. The insurance policy covers the presumption of loss. The insured person is indemnified for the actual loss suffered by him. Insurance thus provides financial protection to the insured. Life insurance policies may also use as collateral security for raising loans.

Encouragement of Savings

Insurance protects against risks, and several other incentives encourage people to insure. Since regularity and punctuality of payment of premium is a prerequisite for keeping the policy in force, the insured feels compelled to save.

Promotion of Efficiency and Motivation

Insurance has contributed significantly to the advancement of industry and trade. The large-scale industrial and commercial organizations today result from the various services provided by insurance companies. By eliminating worries and uncertainty of risks, people in business feel motivated and encouraged to take risks to enhance their profit-earning. It also helps in improving their efficiencies.

Prevention of Losses

The insurance companies help in the prevention of losses as they join hands with those institutions which are engaged in loss-prevention measures. The diminishing in losses means that the insurance companies would be necessary to pay lesser compensations to the assured and manage to accumulate more savings, which, in turn, will assist in reducing the premium.

Providing Funds for Investment

Insurance provides protection and capital to society—usually, accumulated funds through savings in insurance premia invested in economic development plans or productivity projects. The vast financial reservoir built up by the insurance sector furnishes a reasonable means of capital formation in the country.

The Solution to Social Problems

One of the essential functions of insurance is to take care of many social problems. We have insurance against industrial injuries, road accidents, old age, disability or death, etc. Without insurance, business people and individuals will have to provide for all such risks. With no or little savings for investment, no economic growth would be possible. Thus, insurance is of excellent service to society and is a reasonable means of solving many social problems.