Insurance is a form of risk management primarily used to hedge against the risk of potential financial loss.
Again insurance is defined as the equitable transfers of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care.
Insurance is necessary because it provides protection against risk of loss arising for a contingency, thus allows the insured to be assured of his future.
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 relives the person form such difficult task. Moreover, if the subject matters are not adequate, the self-provision may prove costlier. There are different types of uncertainly 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 uncertainties 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 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. The insurance cannot check the happening 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 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.
4. Assistance to business enterprise
No large scale business could possibly function freely without transferring many of its risk to insurers.
In the absence of insurance business, most of the business men would have been required to put aside some of their capital resources against the possibility of unforeseen losses or contingencies.
Insurance safeguard this capital and makes it free for further development of the business.
Apart from this, by means of quick settlement of claims, insurers facilitate reinstatement of the business which ultimately helps in the process of further production.
5. Prevention of loss
The insurance joins hands with those institutions which are engaged in preventing the loss of society because the reduction in loss causes lesser payment to 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 institutions and other organizations which are engaged in preventing the losses of the masses from death or damage.
6. Insurance Provides capital
The insurance provides capital lo (he 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.
7. 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 achievement. It improves not only his efficiency, but the efficiencies of the masses are also advanced.
8. Insurance 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 property, the valuable assets, the man, the machine and the society cannot lose much at the disaster.
9. Insurance Creates Invisible export
Insurance has immense potentiality to work as invisible export of a country by way of providing insurance services abroad. This may be done either by providing direct insurance services abroad or by accepting reinsurance from abroad.
Such an export will definitely have favorable impact on the balance of payment of a country and can indeed assume a major proportion of the total exportable items.
10. Inspection service
Insurers, through their inspection and survey services, assists the insured/public to recognize the extent to which the various features contribute to the creation or reduction of risks by classified statistics which they compile based on (the experience for each trade and type of risk.
Highly skilled officials in this department or hired professional surveyors enable the insurers to correctly rate the risk proposed.
They also make recommendations as to how risk could be improved. Such services have a positive impact in the ultimate minimization or reduction of national waste.
11. Insurance helps in Reducing in Inflation
The insurance reduces the inflationary pressure in two ways. First, by extracting money in supply to the amount of premium it collected and secondly, by providing sufficient funds for production narrow down the inflationary gap.
The two main causes of inflation, namely, increased money in supply and decreased production are properly control id by insurance business.
The function of insurance is to spread the loss over a large number of persons who agree to co-operate each other at the time of loss.
The risk cannot be averted but loss occurring due to a certain risk can be distributed amongst the agreed persons. This is why it’s most necessary.