Insurance is a contract, there are two parties one party is the 'insured' and other party is the 'insurer'. The elementary purpose of insurance is to provide protection against future risk, accident, and uncertainty. Functions of Insurance may be divided into three categories namely - 1 Primary Functions, 2.Secondary Functions, 3.Other functions or Indirect Functions.

Meaning and Definition of Insurance

      Insurance is a contract between the insurer and insured under which the insurer undertakes to compensate the insured for the loss arising from the risk insured against. In simple words, Insurance is a contract in which one party (the insurer), for a consideration (the premium),  assumes a particular risk of the other party(the insured) and promises to pay to the other party or his beneficiary, a certain or ascertainable sum of amount on the happening of specified contingency against which the insurance is asked for.

Some Important Definitions of Insurance - 

Ghosh and Agarwal -  According to Ghosh and Agarwal," Insurance is a Co-operative form of distributing a certain risk over a group of persons who are exposed to it"

John Megi - According to John Megi, "Insurance is a plan wherein persons collectively share the losses of risk"

Encyclopaedia Britannica -  According to Encyclopaedia Britannica, " Insurance may be defined as a  social device whereby a large group of individuals,  through a system of equitable contributions, may reduce or eliminate the measurable risk of economic loss common to all member of the group"

Functions of Insurance - 

According to According to Sir William Beveridge, functions of Insurance may be divided into three categories namely -

1 Primary Functions

2.Secondary Functions

3.Other functions or Indirect Functions.

1) Primary functions of Insurance

Primary Functions of Insurance are as follows -

(a) Provide protection -

   The most important function of insurance is to provide protection against future risk, accident, and uncertainty.It is one check the reality of the misfortune happening and pays the cost of damages of losses.

(b) Ensure Certainty -

      No one knows what will happen next, the future is uncertain. Any misfortune happening may occur at any stage of life the amount of loss and time of losses both are uncertain. Insurance is a device which helps change uncertainty into certainty. Insurance provides certainty of payment for the uncertain loss.

(c) Evaluate Risk -

     In our daily life we anticipate various kinds of unforeseen risks and therefore the loss arising from such risks is also unpredictable. Insurance fixes the likely volume of a risk and by assessing diverse factors that give rise to risk. According to Layman "Insurance is a guard against pecuniary loss arising on the happening of unforeseen event and a device to share the Loss".

(d) Distribution of risk / Collective Risk Sharing  -

  Insurance is it wise to share the financial loss. It is a cooperative effort where the risk is distributed among the group of People. Thus, no one have to bear the losses occurred due to uncertainty.

2) Secondary Functions of Insurance

Secondary Functions of Insurance Are as follows -

(a) Insurance Prevent Losses - 

      Insurance plays important role in preventing losses, it provides certainty and prevent losses.  Insurance provides certainties towards risks in entrepreneurship so that entrepreneurs canconcentrate on Innovative and profitable techniques of the production.

(b) Provides Capital and Help in Economic Progress -

     As we know insurance plays important role in human life. Insurance helps in Economic Progress of Insured. It provides capital and helps in commercial prosperity.  It develops the trade and commerce of the nation.

(c) Ensure Welfare of Society - 

     Insurance serves the sociological purpose, Insurance indirectly helps Nation and contribute its progress. Insurance provides security and minimizes worries of losses or damage, destruction, and death. It helps in commercial prosperity. It develops the trade and commerce of the nation.  Insurance gives Confidence in the general public.

3) Other Functions / Indirect functions of insurance -

Other Functions or Indirect functions of Insurance are as follows -

1. Saving and Investment -  

      It is one of the important source of investment.In India,  One more important thing is that in India, Income Tax Act gives relief in payment of income tax. It encourages the habit of savings among the people. In India, Life Insurance is also a method of Savings.

2. Risk-Free Trade -

            As above mentioned insurance provides certainty and provides protection for future loss or damage. It provides Indemnity in the event of unexpected loss or damages or disaster.  Insurance boosts exports, making foreign trade risk free with the help of the different type of Policy under marine insurance cover

3. Medium of Earning Foreign Exchange - 

         In international business, Any Country can earn foreign exchange by way of issue of marine insurance policies. There are some other ways also available. In India, it is Compulsory to take Marine Insurance Policy in foreign trade.

See also...

Kinds/ Types of Insurance

Types of Marine Insurance Policies | Insurance Law

Establishment, Constitution and Capital of the Life Insurance Corporation of India


See Also..