Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. Insurance may be described as a social device to reduce or eliminate risks of loss to life and property. “Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk.” – M.N. MISHRA.
Primary Function focus on –
- Provision of certainty of payment at the time of loss
- Provision of protection Risk sharing
Primary Functions –
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.
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 a loss in absence of insurance. The insurance guarantees the payment of loss and thus protects the assured from sufferings.
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 the time of damage or death, but today, on the other basis of the 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.
Assistance to the business enterprise: No large scale business could possibly function freer without transferring many of its risk to insurers. In the absence of the insurance business, most of the businessmen would have been required to put aside some of their capital resources against the possibility of unforeseen losses or contingencies.