What Are the Functions and Benefits of Insurance?
Functions of insurance are the roles of insurance through the insurance mechanism, whereas the benefits of insurance are the positive attributes enjoyed by the insured.
What Are Functions of Insurance?
1. Risk transfer
This is the primary function why insurance exists. People and corporates transfer their risks exposure and the costs to manage such risks to insurance companies. Thus, insurance companies meet the costs in cases of losses attributed to the risks of loss suffered.
In cases where a business is exposed to the risks of injury that staff can sustain in case of free or any other accident. An organization can insure such staff and transfer the costs related to injuries to insurance companies.
2. Creation of fund pool
Insurance companies bring people and corporates together to contribute and compensate for the losses suffered by a few. Once a person or an entity has been insured, they must pay an annual or monthly premium towards their cover. Insured parties thus raise money used by insurance companies to compensate people who have lost their fortune in the event of risks insured against.
An insurance company pool together premium from car owners. When one of the car owners suffers a loss in an accident, fire, or any other related pure risk, money amounting to their exact financial position before the risk of loss is paid out to indemnify such car owners.
3. Maintenance of equitable premiums
When an insurance company is compensating the insured, premiums of another insured are being used to compensate for the risks of loss that has been suffered. A single pool of risks constitutes a different degree of risks in terms of individual and corporates.
It would not be fair to charge a corporate the same premium as an individual. This is because if an individual is charged a premium and by chance, a corporate suffers the risk of loss, fairness is not justified. For equitable premiums, insurance companies must consider the nature of the insured and the risks exposure they bring on board by getting their risk of loss insured.
Thus, an individual must not be treated as corporate in determining the number of premiums to pay for a risk of loss to be covered. There must be a grouping of insured to ensure fairness in the determination of premiums.
What Are Benefits of Insurance Coverage?
1. Source of earning
Insured get some earning from insurance policies that they have. This majorly happens for life assurance policies. Take, for instance, endowment assurance, where the assured get paid if they outlive the specified period one the endowment assurance policy cover. In other life assurance policies, beneficiaries can still earn income if the assured has died. This takes into consideration the terms and conditions of different life and heath assurance policies.
Alex has an endowment policy that expires in the ‘n’ period. If John survives this ‘n’ period, he will get paid the benefit from the endowment policy. John can also enjoy a revisionary bonus or even a terminal bonus alongside the payment on maturity of the ‘n’ period.
When an insurance company has pooled funds from different insured parties, there are many ways these funds can be redistributed to the economy. One such way is through investment in the economy. Insurance companies can invest in other sectors of the economy, create employment and earn more revenue from such investment. Insurance companies can also take an active part in mortgage loans and facilitate internal government borrowing.
Britam Holdings PLC injected 9,048,626.92 US Dollars in January of 2021 to HF Finance group, a housing financing company.
3. Peace of mind
When one has transferred their risk to an insurance company, they are left with peace of mind to focus on their core business. Furthermore, a business or an individual operates confidently without the fear of any risks. This is because they are assured to be indemnified in the event of the occurrence of risks of loss.
Corporates have the confidence to carry out risky business activities, for instance, transport and distribution of finished goods. For instance, Coca-Cola ensures finished goods are in transit and distributed to different markets with peace of mind. This is because they have transferred risks associated with such business activity to an insurance company, and thus in case of an eventuality, they will get indemnified.
4. Loss control
When one has taken an insurance cover, insurance companies educate the insured on how to control the risks of loss insured against. In other cases, insurance companies can research on behalf of the insured to understand risks better.
Insurance can educate an entity on pre-loss safety measures that should be adopted before an earthquake. An insurance company can also educate an entity on the best withdrawal strategies during and after an earthquake to significantly reduce the extent of the loss.
5. Stabilizing economy
When an insurance company has indemnified the insured, they can continue with their business activities as usual. Thus, they continue building the economy without struggles to bounce back. Furthermore, such indemnified individual or entity retains its labor force, implying that no one is rendered jobless. The larger picture for this is sustained economic activity and hence a stable economy.
Suppose an insurance company has compensated an entity that lost its equipment to fire. In that case, such an entity can continue with its operations without laying down workers or closing down its premises.
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