There is a type of function of insurance. Insurance is the collection of institutions, programs, and policies that provides financial protection against the risk of future financial loss. They help pay for healthcare, workplace injuries, and illnesses, home fire damage, or burglary, with a variety of plans to meet your needs. Insurance also covers legal costs and protects investments.
You can purchase insurance to cover losses from a number of events including car accidents, fires, life events, and unforeseen circumstances. Therefore, It is a well-known fact that one of the main functions of insurance is to pool risks in society. It does so by transferring the financial responsibility for unlikely but very costly events from individuals to a large group of people.
Generally, the larger the pool, the more cost-effective it is. This is called insurance risk management. The risks can be spread over a very large number of individuals or households also called risk pools.
A basic form of insurance is to ensure that no member of the group is entirely left out-of-pocket if insurance against specific events is bought by a sufficient proportion of the group members. It works well in situations where each member faces the same level of risk, and where the number of members is huge, and so losses are likely to be spread across many people.
What do you mean by Insurance?
Insurance is an agreement between two parties where one party, the insurer, promises to make payments to the other party if certain specified circumstances occur. In exchange for this promise of payment, the insurer typically charges a fee (called a premium) for providing this insurance.
What are the types of Insurance?
- Life Insurance: Used to protect the financial needs of your family and dependents through death or disability.
- Health Insurance: Used to cover medical expenses.
- Property Insurance: Used to cover physical loss of property and damage due to natural calamities like floods, earthquakes, fires, etc.
- Vehicle insurance: Used to cover the loss or damage caused by theft or accidents according to the terms and conditions of the policy.
What is the importance of Insurance?
Insurance helps people manage risk and vulnerability. It also provides people with a better way to live and work together. Access to insurance offers significant benefits for both individuals and society as a whole.
In fact, in the twenty-first century, insurance has become more than just an important financial tool to address the risk management needs of consumers. It has become a crucial instrument in providing world-class customer service across industries around the globe.
What are the Benefits of Insurance?
Benefits of insurance are:
- Premiums are usually lower than the expected benefit.
- Insurers have a legal right of recovery in case the beneficiary is not able to pay his/her premiums. Example: If you do not keep your insurance policy after its term, your insurer can claim your death benefit in case of your death.
- Insurers make a profit for each policy by charging premiums and keeping some amount as profits or surplus.
- It is advantageous for the insured to pay premiums on a regular basis. Because the insurer might not make any profit if the insured’s policy is canceled.
- People with different levels of risk can be combined into one large pool. Therefore, spread risks among them thereby reducing each person’s cost of insurance.
- Risk is dispersed among many people instead of being concentrated within a single individual. Therefore, organizations may lead to adverse selection in health insurance and higher premiums or denial of insurance coverage in other types of insurance policies.
What are the Function of Insurance?
The main functions of insurance are to
- pool risks,
- spread financial risk,
- make decisions based on its adequacy,
- communicate information between insurers and its customers,
- restore equity to society,
- provide diversification of risks among different policies, among policyholders, and many other functions which depend on the insurance market.
Types of function of Insurance
- Financial protection
- Risk management
- Economic incentive
- Equity and fairness
which of the following is not a function of insurance
Risk Management
Risk Management is not a function of Insurance it is the main purpose of insurance.
Economic Incentive
Economic Incentive is not a function of Insurance it is the main purpose of insurance.
Equity and Fairness
Equity and Fairness are not a function of Insurance it is the main purpose of insurance.
Financial protection
Financial Protection is not a function of Insurance it is the main purpose of insurance.