Life is full of uncertainties. The chances of occurrence of an event causing losses are quite uncertain. There are risk of death and disability for human life; fire and burglary risk for property; perils of the sea for shipment of goods and, so on. If any of these takes place, the individuals and / or, organization may suffer a great loss, sometimes beyond their capacities to bear the same. It is to minimize the impact of such uncertainties that there is a need for insurance. Investment in factory building or heavy equipment or other assets is not possible unless there is arrangement for covering the risks, with the help of insurance.
Insurance is thus a contract or agreement under which one party agrees in return for a consideration to pay an agreed amount of money to another party to make a loss, damage or injury to something of value in which the insured has a pecuniary interest as a result of some uncertain event. The agreement / contract are put in writing and are known as ‘policy’. The person whose risk is insured is called ‘insured’ and the firm which insures the risk of loss is known as insurer / assurance underwriter.
Functions of Insurance
(I)Providing certainty: Insurance provides certainty of payment for the risk of loss. There are uncertainties of happening of time and amount of loss. Insurance removes these uncertainties and the assured receives payment of loss. The insurer charges premium for providing the certainty.
(ii)Protection: Insurance cannot stop the happening of a risk or event but can compensate for losses arising out of it.
(iii)Risk sharing: On the happening of a risk event, the loss is shared by all the person exposed to it. The share is obtained from every insured member by way of premiums.