The two words were used synchronously at one time, but there is fine distinction between the two. ‘Assurance’ is used in those contracts which guarantee the payment of a certain sum on the happening of a specified event which is bound to happen sooner or later, for example attaining a certain age or death. Thus life policies comes under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed compensation of the happening of certain events stipulated in the contract which are not expected but which may happen, for example risk relating to fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable to all types of insurance (life, fire, marine and general insurance).
- Sharing of Risks - Insurance is a device to share the financial losses which may occur to individual or his family on the happening of certain events
- Co operative Device – Insurance is a co-operative device to spread the loss caused by a particular risk over a large caused by a particular risk over a large number of persons who are exposed to it and who agree to insure themselves against the risk.
- Value of Risk – Risk is evaluated at the time of insurance. There are several methods of valuing the risk. Higher the risks, higher will be premium
- Payment on Contingency -If the contingency occurs, payment is made; payment is made only for insured contingency. If there is no contingency, no payment is made. In life insurance contract, payment is certain because the death or the expiry of term will certainly occur. In other insurance contract like fire, marine, the contingency may or may not occur
- Amount of Payment of Claim - The amount of payment depends upon the value of loss occurred due to the particular insured risk. The insurance is there upto that amount. In life insurance insurer pay a fixed sum on the happening of an event or within a specified time period.
Example – In fire insurance, if fire occurs and half the property is destroyed, but the whole property is insured, then payment of claim will be made only for that half building that is destroyed not the whole amount of insured.
- Insurance is different from Charity - In charity, there is no consideration but insurance is not given without premium
- Large number of Insured Person - Insurance is spreading of loss over a large number of persons. Larger the number of persons, lower the cost of insurance and amount of premium and incase lower the number of persons, higher the cost of insurance and amount of premium.
- Insurance is different from Gambling - In gambling, there is no guarantee of gain, by bidding the person expose himself to risk of losing. Whereas in insurance, by getting insured his life and property, he protect himself against the risk of loss.
Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
II Secondary functions.
I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of payment at the uncertainty of loss. The elements of uncertainty are reduced by better planning and administration. The insurer charges premium for providing certainty.
2. Insurance provides protection : The main function of insurance is to provide protection against risk of loss. The insurance policy covers the risk of loss. The insured person is indemnified for the actual loss suffered by him. Insurance thus provide financial protection to the insured. Life insurance policies may also be used as collateral security for raising loans.
3. Risk sharing : All business concerns face the problem of risk. Risk and insurance are interlinked with each other. Insurance, as a device is the outcome of the existence of various risks in our day to day life. It does not eliminate risks but it reduces the financial loss caused by risks. Insurance spreads the whole loss over the large number of persons who are exposed by a particular risk.
II Secondary Functions
1. Prevention of losses : The insurance companies help in prevention of losses as they join hands with those institutions which are engaged in loss prevention measures. The reduction in losses means that the insurance companies would be required to pay lesser compensations to the assured and manage to accumulate more savings, which in turn, will assist in reducing the premiums
2. Providing funds for investment : Insurance provide capital for society. Accumulated funds through savings in the form of insurance premium are invested in economic development plans or productivity projects.
3. Insurance increases efficiency : The insurance eliminates the worries and miseries of losses. A person can devote his time to other important matters for better achievement of goals. Businessman feel more motivated and encouraged to take risks to enhance their profit earning. This also helps in improving their efficiencies.
4. Solution to social problems : Insurance take care of many social problems. We have insurance against industrial injuries, road accident, old age, disability or death etc.
5. Encouragement of savings : Insurance not only provides protection against risks but also a number of other incentives which encourages people to insure. Since regularity and punctuality pf payment of premium is a perquisite for keeping the policy in force, the insured feels compelled to save.
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