Functions of an Insurance Company
Functions of an Insurance Company
1] Provides Reliability
The main function of insurance is that eliminates the uncertainty of an unexpected and sudden financial loss. This is one of the biggest worries of a business. Instead of this uncertainty, it provides the certainty of regular payment i.e. the premium to be paid.
2] Protection
Insurance does not reduce the risk of loss or damage that a company may suffer. But it provides a protection against such loss that a company may suffer. So at least the organisation does not suffer financial losses that debilitate their daily functioning.
3] Pooling of Risk
In insurance, all the policyholders pool their risks together. They all pay their premiums and if one of them suffers financial losses, then the payout comes from this fund. So the risk is shared between all of them.
4] Legal Requirements
In a lot of cases getting some form of insurance is actually required by the law of the land. Like for example when goods are in freight, or when you open a public space getting fire insurance may be a mandatory requirement. So an insurance company will help us fulfil these requirements.
5] Capital Formation
The pooled premiums of the policyholders help create a capital for the insurance company. This capital can then be invested in productive purposes that generate income for the company.
Principles of Insurance
As we discussed before, insurance is actually a form of contract. Hence there are certain principles that are important to ensure the validity of the contract. Both parties must abide by these principles.
1] Utmost Good Faith
A contract of insurance must be made based on utmost good faith ( a contract of uberrimate fidei). It is important that the insured disclose all relevant facts to the insurance company. Any facts that would increase his premium amount, or would cause any prudent insurer to reconsider the policy must be disclosed.
If it is later discovered that some such fact was hidden by the insured, the insurer will be within his rights to void the insurance policy.
2] Insurable Interest
This means that the insurer must have some pecuniary interest in the subject matter of the insurance. This means that the insurer need not necessarily be the owner of the insured property but he must have some vested interest in it. If the property is damaged the insurer must suffer from some financial losses.
3] Indemnity
Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the responsibility of compensating the insured against any possible damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity.
4] Subrogation
This principle says that once the compensation has been paid, the right of ownership of the property will shift from the insured to the insurer. So the insured will not be able to make a profit from the damaged property or sell it.
5] Contribution
This principle applies if there are more than one insurers. In such a case, the insurer can ask the other insurers to contribute their share of the compensation. If the insured claims full insurance from one insurer he losses his right to claim any amount from the other insurers.
6] Proximate Cause
This principle states that the property is insured only against the incidents that are mentioned in the policy. In case the loss is due to more than one such peril, the one that is most effective in causing the damage is the cause to be considered.
1] Provides Reliability
The main function of insurance is that eliminates the uncertainty of an unexpected and sudden financial loss. This is one of the biggest worries of a business. Instead of this uncertainty, it provides the certainty of regular payment i.e. the premium to be paid.
2] Protection
Insurance does not reduce the risk of loss or damage that a company may suffer. But it provides a protection against such loss that a company may suffer. So at least the organisation does not suffer financial losses that debilitate their daily functioning.
3] Pooling of Risk
In insurance, all the policyholders pool their risks together. They all pay their premiums and if one of them suffers financial losses, then the payout comes from this fund. So the risk is shared between all of them.
4] Legal Requirements
In a lot of cases getting some form of insurance is actually required by the law of the land. Like for example when goods are in freight, or when you open a public space getting fire insurance may be a mandatory requirement. So an insurance company will help us fulfil these requirements.
5] Capital Formation
The pooled premiums of the policyholders help create a capital for the insurance company. This capital can then be invested in productive purposes that generate income for the company.
Principles of Insurance
As we discussed before, insurance is actually a form of contract. Hence there are certain principles that are important to ensure the validity of the contract. Both parties must abide by these principles.
1] Utmost Good Faith
A contract of insurance must be made based on utmost good faith ( a contract of uberrimate fidei). It is important that the insured disclose all relevant facts to the insurance company. Any facts that would increase his premium amount, or would cause any prudent insurer to reconsider the policy must be disclosed.
If it is later discovered that some such fact was hidden by the insured, the insurer will be within his rights to void the insurance policy.
2] Insurable Interest
This means that the insurer must have some pecuniary interest in the subject matter of the insurance. This means that the insurer need not necessarily be the owner of the insured property but he must have some vested interest in it. If the property is damaged the insurer must suffer from some financial losses.
3] Indemnity
Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the responsibility of compensating the insured against any possible damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity.
4] Subrogation
This principle says that once the compensation has been paid, the right of ownership of the property will shift from the insured to the insurer. So the insured will not be able to make a profit from the damaged property or sell it.
5] Contribution
This principle applies if there are more than one insurers. In such a case, the insurer can ask the other insurers to contribute their share of the compensation. If the insured claims full insurance from one insurer he losses his right to claim any amount from the other insurers.
6] Proximate Cause
This principle states that the property is insured only against the incidents that are mentioned in the policy. In case the loss is due to more than one such peril, the one that is most effective in causing the damage is the cause to be considered.
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