Functions of Insurance

Functions of Insurance

Insurance Functions

The insurance functions can be divided into 3 types: 1. Primary Functions 2. Secondary Functions 3. Other Functions. These three Insurance Functions can be explained below.

functions of insurance

Primary Functions

  1. Provide protection: The primary function of insurance is to protect against future risk, accidents, and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic losses, by sharing the risk with others.
  2. Collective Bearing of Risk: Insurance is a device to share the financial loss of a few among many others. Insurance is a means by which few losses are shared among a larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk are paid.
  3. Assessment of Risk: Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. The risk is the basis for determining the premium rate also.
  4. Provide Certainty: Insurance is a device, which helps to change from uncertainty to certainty. Insurance is a device whereby the uncertainty risk may be made more certain.

Secondary Functions

  1. Prevention of Losses: Insurance cautions individuals and businessmen to adopt suitable devices to prevent unfortunate consequences of risk by observing safety instructions; Prevention of losses causes the lesser payment to the assured by the insurer and this will encourage more savings by way of premium. Reduced rate of premiums stimulates more business and better protection to the insured.
  2. Small Capital to cover larger risks: Insurance relieves the businessmen from security investments, by paying a small amount of premium against larger risks and uncertainty.
  3. Contributes towards the development of larger industries: Insurance provides development opportunities to those larger industries having more risks in their setup. Even the financial institutions may be prepared to give credit to sick industrial units that have insured their assets including plant and machinery.

Other Functions

1. Means of savings and investment: Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured to avail income-tax exemptions also, people invest in insurance.

2. Source of earning foreign exchange: Insurance is an international business. The country can earn foreign exchange by way of the issue of marine insurance policies and various other ways.

3. Risk-free trade: Insurance promotes exports insurance, which makes the foreign trade risk-free with the help of different types of policies under marine insurance.

Characteristics of Insurance Contract

1. Offers and Acceptance: There exists an agreement between the two parties in the insurance contract. This agreement comes into force when one party proposes and another party accepts the proposal. In an insurance contract, the offer for entering into a contract generally comes from the insured and the insurance company gives the acceptance.

2. Free Consent: The parties to the contract must agree and there must be free consent. “Free Consent” is not caused by:

  1. Coercion,
  2. Undue influence,
  3. Fraud,
  4. Misrepresentation, or
  5. Mistake.

When there is not free consent except fraud the consent becomes avoidable at the option of the party whose consent was so caused. If there is fraud the contract would be void.

3. Competent to make Contract: Both proposer and accepter should be competent to contract. Normally, a minor, a person of unsound mind, an alien enemy, an undischarged insolvent, and a criminal cannot enter into a contract. The contract made by incompetent party/parties will be void.

4. Lawful Object: To make a contract valid the object of the agreement should be lawful. An object that is :

  1. Not forbidden by law, or
  2. Is not immortal, or
  3. Opposed to public policy, or
  4. Which does not defeat the provisions of any law, is considered lawful.

For example, An insurance contract related to the risks of smuggling will not be valid because the objective of smuggling is not lawful.

5. Legal Consideration: The agreement is enforceable only when the contract is supported by consideration. Premium being the valuable consideration that must be given or starting the insurance contract. The amount of premium is not important to begin the contract. The fact is that without payment of premium the insurance contract cannot start.

6. Legal relationship: When the two parties agree, their intention must be to create a legal relationship between them.

7. Agreement Not Declared Void: The agreement must not have been expressly declared void by any law in force in the country.

8. Certainty and possibility of performance: An agreement to do an act is impossible it cannot be enforced.

9. Legal formalities: It must comply with the necessary legal formalities such as stamps, registration, etc.