Page 43 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes 3.2.1 Primary Functions

Following are the primary functions of insurance:
1. Insurance provides certainty: Insurance provides certainty of payment at the uncertainty
of loss. The uncertainty of loss can be reduced by better planning and administration. But,
the insurance relieves the person from such difficult task. Moreover, if the subject matters
are not adequate, the self-provision may prove costlier. There are different types of
uncertainty in a risk. The risk will occur or not, when will occur, how much loss will be
there.

In other words, there are uncertainty of happening of time and amount of loss. Insurance
removes all these uncertainty and the assured is given certainty of payment of loss. The
insurer charges premium for providing the said certainty.
2. Insurance provides protection: The main function of the insurance is to provide protection
against the probable chances of loss. The time and amount of loss are uncertain and at the
happening of risk, the person will suffer loss in absence of insurance. The insurance
guarantees the payment of loss and thus protects the assured from sufferings.

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Caution The insurance cannot check the happening of risk but can provide for losses at the
happening of the risk.
3. Risk-Sharing: The risk is uncertain, and therefore, the loss arising from the risk is also
uncertain. When risk takes place, the loss is shared by all the persons who are exposed to
the risk. The risk sharing in ancient time was done only at time of damage or death, but
today, on the basis of probability of risk, the share is obtained from each and every
insured in the shape of premium without which protection is not guaranteed by the
insurer.

3.2.2 Secondary Functions

Besides the above primary functions, you need to know that the insurance works for the following
functions:
1. Prevention of loss: The insurance joins hands with those institutions which are engaged in
preventing the losses of the assured and so more saving is possible which will assist in
reducing the premium. Lesser premium invites more business and more business cause
lesser share to the assured. So again premium is reduced to, which will stimulate more
business and more protection to the masses. Therefore, the insurance assist financially to
the health organization, fire brigade, educational institution and other organizations
which are engaged in preventing the losses of the masses from death or damage.
2. It provides Capital: The insurance provides capital to the society. The accumulated funds
are invested in productive channel. The dearth of capital of the society is minimized to a
greater extent with the help of investment of insurance. The industry, the business and the
individual are benefited by the investment and loans of the insurers.
3. It improves Efficiency: The insurance eliminates worries and miseries of losses at death
and destruction of property. The care-free person can devote his body and soul together
for better achievement. It improves not only his efficiency, but the efficiencies of the
masses are also advanced.

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