Primary functions of insurance
- Providing protection – The elementary purpose of insurance is to allow security against future risk, accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others.
- Collective risk bearing – Insurance is an instrument to share the financial loss. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid.
- Evaluating risk – Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well.
- Provide Certainty – Insurance is a device, which assists in changing uncertainty to certainty.
Secondary functions of insurance
- Preventing losses – Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.
- Covering larger risks with small capital – Insurance assuages the businessmen from security investments. This is done by paying small amount of premium against larger risks and dubiety.
- Helps in the development of larger industries – Insurance provides an opportunity to develop to those larger industries which have more risks in their setting up.
Other functions of insurance
- Is a savings and investment tool – Insurance is the best savings and investment option, restricting unnecessary expenses by the insured. Also to take the benefit of income tax exemptions, people take up insurance as a good investment option.
- Medium of earning foreign exchange – Being an international business, any country can earn foreign exchange by way of issue of marine insurance policies and a different other ways.
- Risk Free trade – Insurance boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover.
Importance of Insurance
Insurance does influence the growth and development of an economy in several ways. The availability of insurance can mitigate the impacts of risk by providing products which help organizations and individuals to minimize the consequences of risk and has a positive effect on industry growth as entrepreneurs are able to cover their risks. In the absence of a full range of insurance products and/or deficient products in terms of coverage and scope, the risk-taking abilities would be hampered and chances are that the economic activities would turn out to be high-risk activities. The implications of leaving various risks uncovered can be significant and the impact of losses can be devastating creating a huge burden on the governments. Therefore, a strong and competitive insurance industry is considered imperative for economic development and growth. However, the contribution of the insurance companies is also dependent on the fact that they are able to pool risks effectively. Only then would it be possible to cover these risks at an affordable and reasonable cost as the insurance provider will be able to spread the risks throughout the economy.
The insurance industry is also an integral part of the financial system for effective functioning of the financial system, it is important that the markets are efficient by ensuring liquidity and transparency in price discovery. The role of the insurance companies as financial intermediaries is also considered significant in making these markets efficient by providing liquidity and credit. This, in turn, helps in lowering down the cost of capital and providing risk-free opportunities to all participants in the market.
Insurance companies perform a type of monetary redistribution – they collect premiums and eventually redistribute that money as payments. Depending on the type of insurance, redistribution can take anywhere from a few months to many decades. Because of this delay between collecting and paying out funds, insurance companies invest their funds to bring in extra revenues. Such investments help businesses and governments finance their operations, and profits from these investments support the operations of insurance companies. With these investment earnings, insurance companies can keep rates much lower than would otherwise be possible. Not all effects of insurance are positive ones. The possibility of earning insurance payments motivates some people to attempt to cause damage or losses. Without the possibility of collecting insurance benefits, for instance, no one would think of arson, the willful destruction of property by fire, as a potential source of money.
Principles of Insurance:
The fundamental principles upon which a contract of insurance is based include:
- Utmost good faith – both the parties should make disclosure of all materials facts and figures relating to the subject matter of insurance contract.
- Insurable interest – insured must have an insurable interest in the subject matter of Insurance.
- Indemnity – insured should be restored to approximately the same financial position as existed before the loss.
- Causa proxima – risk insured against must be the proximate cause of loss occurred.
- Mitigation of loss – the insured must make necessary effort to mitigate loss as much as possible.
- Subrogation – transfer of all the rights and remedies available to the insured in respect of the subject matter to the insurer after indemnity has been affected.
For citing this article use:
- Kumari, J. V. J. (2015). A study on customer relationship management in insurance sector.