Characteristics of Insurance:
An Insurance contract has the following characteristics1, which are generally, observed in the case of all kinds of insurance contracts, whether life, marine, fire, or miscellaneous insurance.
1. Risk Sharing and Risk Transfer: Insurance is a device to share the financial losses, which might occur to an individual or his family-on the happening of a specified event. The event may be death of bread winner of the family in the case of life insurance, marine-perils in marine insurance, fire in fire insurance and other certain events in miscellaneous insurance. The loss arising from these events, if insured, are shared by all the insured in the form of premiums which they have already paid in advance. Hence, the risk is transferred from one individual to a group.
2. Co-operative Device: A group of persons who agree to share the financial loss may be brought together voluntarily or through publicity or through solicitations of the agents. An insurer, by insuring a large number of persons, is able to pay the amount of loss. Like all cooperative devices, there is no compulsion here on anybody to purchase the insurance policy.
3. Calculates Risk in Advance: The risk is evaluated on the basis of probability theory before insuring since the premium payable on a policy is to be determined. The higher values (between 0 and 10 are assigned to those events estimated to have a greater likelihood or probability of occurrence.
4. Payment of Claim at the Occurrence of Contingency: The payment is made on happening of a certain insured contingency. It is true for all non-life insurance that payment will be made on the happening of the specified contingency only.
5. Amount of Payment’: The amount of payment depends upon the value of loss suffered due to the happening of that particular insured risk, provided insurance is here upto that amount The amount of loss at the time of contingency is immaterial in life insurance. But in the property and general insurances, the amount of loss, as well as the happening of loss, is required to be proved.
6. Larger Number of insured Persons: Generally, the past claims experience is repeated with minor variations if a large number of risks are collected. This once again operates by the law of large numbers and is one reason why insurance companies want to do as much business as possible. The ultimate objective is to keep the insurance cost as low as possible.
7. Insurance must not be confused with Charity or Gambling: The uncertainty is changed into certainty by insuring property and life because the insurer promises to pay a definite sum at damage or death. In the absence of insurance, the property owner could be at the best, practice only some form of self-insurance, which may not give him absolute certainty.
Functions and Benefits of Insurance
The primary function of insurance is the equitable distribution of the financial losses of insured, in other words, compensating the few who have lost from the fund built up by the contribution of all the members. The insured member’s contribution to the fund is in proportion to the risk from which he is protected, and it is the special function of the insurer to calculate and charge this contribution or premium. It is also his function to manage the fund so built up and pay compensation to the insured who have suffered losses and the subsidiary functions ofInsurance are:2
- It provides stimulus to business enterprise by releasing capital funds for further development of the business, which otherwise would have to be kept in idle reserve to meet any unforeseen losses or break down of plant and other machinery.
- It encourages business efficiency of the executives by freeing them from fear and anxiety in respect of their insurable risk and leaving them free to give undivided attention to their management problems. Their life insurance gives them confidence that their dependents will not be stranded in the event of their premature death.
- It helps in the reduction of material losses by the community as a whole in the following ways:-
- a. Technical staff of insurers like surveyors etc., inspect installations periodically and make helpful suggestions for the safe and efficient working of the machinery which the insured usually adopt to their benefit.
- b. The system of rating which provides for allowing discount for good features and charging extra for bad features in the risk induces the insured to make improvements which go to reduce losses.
- c. Loss and salvage experts who belong to independent organizations are employed when losses have occurred, to inspect the premises, recommend measures for reducing the losses and to prevent recurrence of the risk.
Benefits of Insurance
The insured feels secured that he would be protected from the insurance fund and this given him freedom from anxiety. The insurer benefits from investing the fund. Some of the indirect advantages of insurance are:3
- Investment of funds – In the course of their business, vast sums are collected by insurers by way of premiums. Especially in life business much of it can be invested profitably over long periods. This benefits the nation as a whole, because insurers are required by law to invest the major portion in government securities, and other approved investments, out of which nation-building activities are undertaken.
- Reduction of cost insurance – Income earned by investment of accumulated funds further increases the funds and goes to reduce the cost of insurance. For otherwise, the premium would have to be higher to that extent.
- Effect on prices – Manufacturers pass on to the consumers the cost of insurance along with other production costs. Still, it is beneficial to the consumers because without insurance the cost would have been much more.
- Invisible export – Providing insurance service overseas is our invisible export, like export of material goods, and the profit brought in is a contribution to the favorable balance of trade.
- Reducing cost of social services – Lie insurance particularly is a way of saving for the future. The sum assured often goes to persons who have lost earning members and thereby relieves their dependent in distress as they would otherwise would have been an additional burden on social security and other public funds.
For citing this article, use:
- Rao, D. J. M. (2012). Sales force management A study on Life Insurance Corporation of India Machilipatnam division.