Functions of insurance are to spread the loss caused by a particular risk over several persons, who are exposed to it and who agree to insure themselves against the risk.
The most important function of insurance is to spread the risk over a number of persons who are insured against the risk, share the loss of each member of the society on the basis of the probability of loss to their risk and provide security against losses to the insured.
So, insurance functions are;
- The system to spread the risk over several persons who are insured against the risk;
- The principle to share the loss of each member of the society based on the probability of loss to their risk; and
- The method to provide security against losses to the insured.
The functions of insurance can be studied into two parts;
- Primary Functions, and,
- Secondary Functions.
7 functions of insurance are;
- Insurance provides certainty,
- Insurance provides protection,
- Prevention of loss,
- It Provides Capital,
- It Improves Efficiency,
- It helps Economic Progress.
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 a 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 is the uncertainty of happening of time and amount of loss. Insurance removes all these uncertainties and the assured is given certainty of payment of loss.
The insurer charges the premium for providing the said certainty.
2. Insurance provides protection
The main function of insurance is to protect the probable chances of loss. The time and amount of loss are uncertain and at the happening of risk, the person will suffer the loss in the absence of insurance.
The insurance guarantees the payment of loss and thus protects the assured from sufferings. The insurance cannot check the happening of risk but can provide for losses at the happening of the risk.
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 times was done only at the time of damage or death; but today, based on the probability of risk, (he share is obtained from every insured in the shape of premium without which protection is not guaranteed by the insurer.
Secondary Functions of Insurance
Besides the above primary functions, the insurance works for the following functions:
4. Prevention of loss
The insurance joins hands with those institutions which ate engaged in preventing the losses of the society because the reduction in loss causes the lesser payment to the assured arid so more saving is possible which will assist in reducing the premium.
Lesser premium invites more business and more business causes 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 assists financially to the health organization, fire brigade, educational institutions and other organizations which are engaged in preventing the losses of the masses from death or damage.
5. It Provides Capital
The insurance provides capital to society. The accumulated funds are invested in the productive channel.
The death of the capital of the society is minimized to a greater extent with the help of investment in insurance. The industry, the business, and the individual are benefited by the investment and loans of the insurers.
6. It Improves Efficiency
Insurance eliminates worries and miseries of losses at death and destruction of property.
The carefree 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.
7. It helps Economic Progress
The insurance by protecting the society from huge losses of damage, destruction, and death, provides an initiative to work hard for the betterment of the masses.
The next factor of economic progress, the capital, is also immensely provided by the masses. The property, the valuable assets, the man, the machine and the society cannot lose much at the disaster.