6 Objectives of Insurance


what is 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 party is insurance company or insurer who agrees to protect and compensate the other party for losses suffered by it. Another one is insured or insurance policy holder 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 policy holders pool their interest together. Loss suffered by any of the insured is paid out of premium amount paid by these policy holders to insurance company.  Insurance is an effective tool to avoid losses by transferring or sharing it with other individual. It boosts confidence level of peoples and acts as supporting pillar by compensating them at time of emergencies.

Insurance helps in economic development of 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. Objectives of Insurance are discussed given in points below:

Objectives of Insurance

Objectives of Insurance
Objectives of Insurance

Granting Security to People

Insurance primarily serves the purpose of granting security against losses and damages to people. It is an agreement enters into by two parties in which one promises to protect other from losses in return for premium paid by other party. One party is insurance company and other one is insured. Insurance companies guarantee the insured of compensation in case of any unfavourable contingency. Insured need to pay premium to insurance companies in return for guarantee of compensation.

Minimisation of losses

Insurance aims at minimisation of losses arising from future risks and uncertainties. It adds certainty of payments to people for happening of uncertain events. Insurance assures the individuals for compensation of losses. It minimises the risk through proper planning and administration. Insurance companies suggest people for taking safety measures like installation of fire detection devices, alarm and cameras system etc. They also join hands with various organisations like fire brigade, health and various organisations which work for reducing losses and damages. This way insurance works toward minimising the happening of various losses.

Diversifying the Risk

Insurance works towards diversifying the risk among large number of people. It aims at reducing the adverse effects of any future contingency by spreading the overall risk associated with it. It is medium through which people share their risk with others. Insurance companies compensate the insured for losses out of premium they charged from their different policy holders. The loss incurred by single individual is diversified among large peoples by insurance companies by utilising the collected premium amount for paying compensations.

Reduces the Anxiety and Fear

Insurance policies relieves the individuals of any tension and fear regarding the future risks and uncertainties. It guarantees them of compensation in occurrence of any unfavourable contingencies. Assurance of compensation is the most relieving factor for tensed and worried people. They are certain of payment on occurrence of various uncertain events. It makes them confident and they focus on their activities with full attention.

Mobilises the Saving

Mobilisation of savings is another important objective of insurance. It attracts people for investments by presenting them with numerous insurance policies guarantying of compensation for losses. Large number of people takes this insurance policy in order to insure them against losses and damages. Insurance companies are able to generate large amount of funds in the form of premium that they charged from their policy holders regularly. These funds are then invested by these companies into securities and stock in market and earn incomes. Ideal lying resources with public are employed by insurance companies towards income generating sources.

Generation of Capital

Insurance companies leads to capital generation by collecting large amount of funds from public. They regularly charges premium from their large customers for providing them protection against losses. These funds are invested for industrial development by subscribing to shares of companies. Companies are able to get their required capital through insurance industry as this invests in companies for earning dividends and other incomes. This boosts the industry performance and economic growth of country. Also, bigger investments lead to creation of various employment opportunities.