Functions of Insurance

Meaning of Insurance

Insurance is a means of protection from any unforeseen losses and contingencies. It is a risk-management technique used for hedging against various uncertain losses. Insurance is a contractual agreement between two parties in which one party promise to protect another party from uncertainties and losses. The first part is the insurance company or insurer who agrees to protect and compensate the other party for losses suffered by it. Another one is insured or insurance policyholder who gets protection under insurance policy in return for premium which he is required to pay regularly to insurer. In simple terms, insurance is just the protection against the losses. By taking insurance policy, different insurance policyholders pool their interest together.

Loss suffered by any of the insured is paid out of the premium amount paid by these policyholders to the insurance company.  Insurance is an effective tool to avoid losses by transferring or sharing it with other individual. It boosts the confidence level of peoples and acts as a supporting pillar by compensating them at time of emergencies. Insurance helps in the economic development of the country by mobilising people’s saving by attracting them for investment in insurance policies.

Insurance companies reinvest the collected amount in different investment avenues for earning profit. There are generally three steps in insurance process: Firstly, select the insurance policy as per your needs, then you need to pay the premium amount regularly and at last claim your insured amount with the help of supporting documents in case if any unfortunate event occurs. Functions of Insurance are described in detail as given below:

Functions of Insurance

Functions of Insurance
Functions of Insurance

Provides Protection

The primary function of insurance is to provide protection to insured in case of any uncertain event. Insurance guarantees the person to protect him from sufferings in case of damages and losses. Future risks and uncertainties cannot be controlled or reduce through insurance but it can only compensate for the losses caused by these uncertain events. Insurance policies help a person to recover back to its original position after incurring losses by compensating them.

Sharing of Risk

Sharing of risk is an important function played by insurance. It is a means of pooling risk of one person among a large number of persons. Compensation for losses suffered by one individual is paid out of premium paid by different policyholders. Risk is diversified and shared among different persons. It reduces the adverse effect of uncertain events on only one person by sharing of risk.

Provides Certainty

Insurance provides reliability and certainty of payments to business. Happening of unexpected events is uncertain and cannot be determined. The uncertainties of these events can be minimized through proper planning and administration. Insurance helps in adding certainty to these uncertain events. It assures businessmen of certain payments on happening of unexpected events. It relieves them from large damages and losses.

Improves the Efficiency

Insurance has an effective role in improving the efficiency of the business. By providing the guarantee for compensation in case of any mishaps, it relieves the businessmen of worries and tension of risk. It boosts their confidence level and they work with full attention towards their roles. Insurance reduces the miseries and concern for losses or damages. This leads to better productivity of the organisation thereby increasing the overall efficiency.

Prevention of losses

It acts as a cover against the losses. Insurance guides business in taking appropriate corrective measures for reducing damages and losses. It suggests them for observing safety measures like installation of automatic fire detective devices, alarm systems etc. Insurance company’s joins hand with institutions which help in avoiding losses like fire brigade, health organisations and other intuitions. It will help in reducing losses which will ensure lower payment of compensation to insured. This will also enable the insurer in reducing the amount of premium and will motivate more savings.

Helps in Earning Foreign Exchange

Insurance is an important means of earning foreign exchange. Several companies operate internationally with many branches in different countries. They need to take insurance policy as per the legal requirements of the country. Several countries earn foreign exchange by issue of insurance policies like marine insurance and many other different policies.

Promotes Economic Development

Insurance promotes the economic development of the country. It leads to generation of large amount of funds by insurance companies through the premium collected by them from insured. It utilises the ideal lying money with people by attracting them for investment in various investment policies. All collected money by insurance companies is invested in shares of various companies and other investment avenues for earning profit. This leads to industrial development in the country thereby accelerating the rate of economic growth.


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