Insurance operates on the premise of large numbers where the insurer takes contributions in the form of premiums from individuals, corporate companies, government agencies/departments, non-government organizations, and business entities exposed to similar or homogeneous risks and creates a common pool/fund from which the insurer pays the few who suffer losses. In addition, insurance-linked securities market (with instruments such as catastrophe bonds) has created direct links between insurers as they sometimes buy such securities to diversify their own risk exposure, while benefiting from investment in instruments linked to their area of expertise. The association is merely a guiding and controlling body. There are different types of insurance policies to cover almost anything you can think of, and countless companies that provide the necessary policies. Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies or perils. The next category is the General Insurance Corporation of India, it was established under the general insurance corporation of India act 1972, it is composed of 4 companies and these 4 companies are National Insurance Companies limited, New India Insurance Companies Limited, Oriental Fire and General Insurance Companies Limited, United India Fire and General Insurance Companies limited. Banks are therefore of particular importance for financial system stability. While the first three … Insurance underwriting is the process of evaluating a company's risk in insuring a home, car, driver, or an individual's health or life. Insurance plays a significant role in the development of the nation’s economy by providing the capital and it converts the uncertainty into certainty and thus brings mental peace to the individuals. Insured get more amount of loan due to certainty of payment at the time of his death. In the case of life insurance, individual as well as his family are protected by the insurance company. • Insurance protects mortgaged property. Learn how your comment data is processed. • Insurance provides security and safety. It was popular before the joint stock companies came into existence. Such investment has an element of regular saving, capital formation and return on capital, in India insured is exempt from income tax, wealth tax, and gift tax. This is better demonstrated for health funeral, and life insurance covers. For example in the event of a terminal illness, the insured will be compensated up to a limit that would help fend for his family without necessarily burdening the other family members. • Insurance as an industry is important to individuals, organizations and society as a whole. In addition to writing for corporate clients, she has published articles in Library Journal and The Searcher. This is mainly because most insurers’ balance sheets, unlike those of banks’, are composed of relatively illiquid liabilities that protect insurers against the risk of rapid liquidity shortages that can and do confront banks. These companies work separately in their area of business but are owned and controlled by the general insurance corporation of India. Since … Various activities are carried out by an insurance company, including the subscription of a policy before its issuance. The management of the investment function is an important element of an insurance company's profitability. Insurance companies evaluate the amount of loss and provide the amount to the insured to recover from the loss, the need and purpose of insurance can be understood through the different viewpoints, these different viewpoints are individual’s viewpoint, viewpoint of business and industry and the viewpoint of the society. The major objective of any insurance cover is to provide peace of mind in the assurance that your losses have been taken care of by the insurance company and you will not need to deep into your pocket to cater for any expenses resulting thereof from the insured event. Different health insurance plans pay for all of these functions in differing amounts, and the premiums differ as well. Reduction in income of an individual may be due to unemployment, disability or death and this requires adjustment in the standard of life of the individual, life insurance policy provides the platform for the insured as well as his dependents to adjust to this change and it does so through endowment policy, anticipated endowment policy and guaranteed triple benefit policies. These concerns are also known as cooperative insurance society. The functions of insurance can be studied into two parts (i) Primary Functions, and (ii) Secondary Functions. So it is the most important sections for IBPS/Sbi or other bank exams.The Insurance industry, till the year 1999-2000, comprised mainly of two players. Where the individual uses the owned assets as collateral in a bank, the insurance company will have to state the interest of the specific bank/lender such that in the event of loss of the property through say accidental fire, then the insurance company will compensate the bank. Types of insurance policies purchased by businesses include the following: The cost of business insurance depends on a number of factors, including the kinds of coverage and policies you need. This act provides special provisions to these concerns but after nationalization, the societies were seized. Insurance is something we buy but hope we never need. • Insurance eliminates dependency. 2. In addition, the traditional view that insurers pose a limited systemic risk can be challenged, however, because it does not take account of the fact that interaction between insurers, financial markets, banks, and other financial intermediaries have been growing. The next type of insurance organization is individual insurer; an individual like other business can perform the job of insurer if he has adequate resources and talent to conduct the insurance business, such insurers are rarely found. Thus insurance helps in economic growth of the country, the next point is insurance reduces inflation, insurances help in narrowing down the inflation gap by collecting the premium and investing the same. It is to be noted that partnership firm is not a distinct entity than its partners composing it so the liability of the partners may be unlimited. Claims. The interconnections between banks in interbank markets and payment systems can also cause problems faced by one bank to spread to others. • Insurance works by creating a pool of homogenous risks from which the losses of the unlucky few are paid for by the premiums of the pool of risks from different policyholders. 3. It is certain that every individual who is born in this world will die someday or the other but the time of death is uncertain, so the time of sufferings and financial problems is also uncertain, in case of insurance policy purchased by the deceased person, assistance is provided to his dependents so that they become financially independent. Mishra, “the mutual companies with cooperative associations formed for the purpose of effecting insurance on the property of its members.”. The main function of insurance is that eliminates the uncertainty of an unexpected and sudden... 2] Protection. Insurance companies sell policies for individuals, families and businesses to provide financial protection in case of a claim or loss. Life insurance has important functions in business and in family and personal life. Get information from business experts at the Small Business Administration (SBA) or the local office of the Small Business Development Center (SBDC). Life Insurance Corporation was established under the Life Insurance Corporation of India act of 1956; all the Life insurance businesses including the annuities in India are owned by LIC. Similarly, if the property is insured, then the insured gets the amount of insurance if the property catches fire or is damaged due to any loss or risk, again in this case, the insurance provides safety and security to the insured as well as its dependents. Every single insurance plan is subject to its terms & conditions that are contained in an insurance contract and thus any insurance assists a partial purpose as decided between 2 parties the Insured (policyholder) and the Insurer (insurance company). The other type of insurance organization is the cooperative insurance organization, these are the concerns which are incorporated or registered under the Indian cooperative society’s act 1938. 2. There is much greater potential for injury on a construction site than in a small storefront business. Let us proceed our discussion with self-insurance, In the words of M.N Mishra-. In this lecture, we will study the different types of Insurance organizations as well as the need and purpose of insurance. Reviewed by: Jayne Thompson, LL.B., LL.M. First of all, insurance performs a distribution function and pays material compensation … Importance of Insurance to a Business/Company, • Uncertainty of business losses is reduced, • Business efficiency is increased since insurance compensation provides the necessary funds for business continuity. There is a responsibility to both the company and the customer. In business, it plays a major role in strategic planning for future operations. F U N C T IO N A L D E F IN IT IO N Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk. Different types of business insurance include professional and product liability, property and workers' compensation. The next category of insurance organizations in India is Deposit Insurance Corporation; it was established in the year 1962 and it provides protection to the depositors of the banks, in case if the bank fails, then the depositors can get their deposits back up to Rs. First, insurers are large investors in financial markets. Insurance Company A company, which may be for-profit, non-profit or government-owned, that sells the promise to pay for certain expenses in exchange for a regular fee, called a premium. In case of self-insurance, the person saves some fund periodically to meet the risk. If each partner in the insurance firm is insured, then the insurance company will pay the amount at the time of his death. Now let us discuss the various insurance organizations in India. In such situation, term insurance policy or convertible term insurance policy fulfill such purpose for the business. Functions of Insurers : Investing & Financing.Insurance companies are referred to as “closed end investment trusts engaged in the underwriting of risks as a means of obtaining funds for investment.”Large size of investment portfolio provides vital importance to this function.It has to serve twin objectives of optimizing income and capital gains plus minimizing risks. The next point is insurance enhances credit, business can obtain loan by pledging the insurance policy as the collateral for the loan. Partnership. The next point is insurance helps in continuation of the business, in the partnership business, the business may discontinue due to the death of one partner and there may be financial problems to the firm as well. For instance, where cover is taken for the assets of the business, the sole proprietor is guaranteed compensation in the event that they caught fire and that indemnification would safeguard the existence and continuity of the business. In this case, the government owns and runs the insurance business and it does so for the benefit and welfare of the society. The function of an insurance company is to help assess your risks and provide you with the right coverage to compensate you for any loss. The next point is insurance encourages economic growth, insurance provides security of life as well as property and provides capital to generate more money. Insurance provides a great deal of security to the insured and leaves him tension free about his life, his dependents, and his property because, in case of loss, insurance company promises the insured to cover all the losses. According to the Law No. Major insurance functions. • Keyman indemnification In a company that has key employees with exceptional leadership, managerial and technical skills, the business will take up Keyman insurance such that in the event that it loses him/her to death, then the compensation shall be used to hire another of similar or related skills without having to incur extra costs say in recruitment. For example, many employee associations and trade unions offer cooperative insurance policies. But in case of life insurance policy, the policyholders may share some portion of the profit of the company in the form of bonus. In this case, the insured becomes his own insurer but self-insurance may be good in case of operating several properties like house, factories, machines, motor vehicle, etc. So dear readers, let us continue this topic with the need and purpose of insurance from the viewpoint of the society, the various points included in this category are insurance protects the wealth of the society, insurance encourages economic growth, insurance reduces inflation. Insurance company definition: a company that sells insurance | Meaning, pronunciation, translations and examples Enter your email address to subscribe to this blog and receive notifications of new posts by email. The shareholders are the real owners of the joint stock companies. Let us discuss these points in detail, the first point is insurance provides safety and security, insurance provides safety and security to the individual against the loss caused due to the happening of a certain event for which he was insured. 40 in the year 2014, the definition of insurance is an agreement between two parties; the insurance company and the policy holder, which serves as the ground for the insurance company to receive a premium in return of: . It is a fair premium collected from members of a common pool that reflects the risk exposure that each of their risks brings to the pool. Let us continue this lecture with the first point that is insurance reduces the uncertainty of business losses, in business property is employed and if there is negligence towards the property, then it may turn into ashes. Traditionally, the insurance sector has been seen as a comparatively stable segment of the financial system. Insurance is a means of protection from financial loss. Costs of insurance premiums are based on risk. Consider additional factors, such as: Denise Dayton, M.S., M.Ed. Needs vary … The money collected from all the clients goes into a pool to pay for the claims made by a few. Machine, cattle and crop insurance protects against the different types of losses, employee insurance and other types of insurance related to business provide confidence to the parties related to the business and the business itself. This leaves the banks vulnerable to depositor runs that can result in liquidity shortages. The definition of insurance can be prepared from 2 … Functions of an Insurance Company 1] Provides Reliability. insurance companies. CORE FUNCTIONS OF AN INSURANCE COMPANY 1:56 PM Posted by Miyadom 1 comment Whilst an insurance intermediary is unlikely to have close contact with the internal organisation of insurance companies, it is good to understand something of their infrastructure and to be aware of the various departments and personnel behind the marketing process. If possible, talk with owners of businesses similar to yours and then meet with an insurance agent about your business needs. It also highlights the special role of reinsurers in the insurance sector and discusses some of the key differences between insurers and banks from a financial stability point of view. is a freelance writer specializing in careers, education and technology. The traditional view that insurers pose less systemic risk than banks did not take into account the growing interaction between insurers, financial markets, banks, and other financial intermediaries. • Insurance affords peace of mind. Insurance companies are playing an important role to manage the risk of individuals. A typical health insurance plan provides four primary functions: provisions for routine care, emergency medical assistance, chronic condition treatment and pharmaceutical care. For example, a construction company pays more for liability insurance than does a flower shop. Thus the risk is not averted … Insurance companies face less regulation, on the securities trading front, than banking, broker dealer and investment management companies. the insured, by paying a definite amount, in exchange for … • Insurance works by creating a pool of homogenous risks from which the losses of the unlucky few are paid for by the premiums of … The Definition of Insurance. Now let us talk about the need and purpose of insurance from the viewpoint of business and industry, the various points included in this category are insurance reduces the uncertainty of business losses, insurance increases the efficiency of the business, insurance provides key man indemnification, insurance enhances credit, insurance helps in continuation of business, insurance encourages welfare of the employees. As in all insurance, the insured transfers a risk to the insurer, receiving a policy and paying a premium in exchange. As in the example above, the insurance company would create a pool of residential house owners since they are exposed to similar or homogenous risks like theft, escape of water from its normal confines (tap and sink). So they are forced to ask for monitory help from the friends and relatives and their situation becomes pitiable, but if the income earning member is insured, then at the time of his death, the insurance company will take care of his dependents and will financially assist them and make them financially independent. In the words of M.N. There are three main functions of insurance and these are: It is a mechanism by which the financial consequences of an event are shifted from one party to another. Definition - What does Cooperative Insurance mean? It may also provide sickness, maternity, disability, medical and pension insurance to its respective employees. DIFFERENT TYPES OF INSURANCE ORGANIZATIONS, 4. Take an example of a property owner (landlord) asking a tenant to sign a tenancy agreement that holds the tenant responsible for any losses arising from the building catching fire. This site uses Akismet to reduce spam. Departmental organizations, corporations, and government companies are mainly the three types of organizations that are active in the insurance business in India. The insurance policy provides funds for the marriage of the daughter of the insured irrespective of his survival, similarly insurance provides for the settlement of the children of the insured when they are done with their education. THE DIFFERENCE BETWEEN BANKS AND INSURANCE COMPANIES. In some cases, insurance investment teams may also lead mergers and acquisitions. The last category of insurance organizations in India is government companies, such companies were established by the government as per the provision of the company’s act, Export Risk Insurance Corporation was established to ensure against the export risk in the year 1957, later in the year 1964, its name was converted into export credit and guarantee corporation, so these were the various insurance organizations available in India. Though it is termed as insurance but it is not insurance because the burden of payment at the time of loss is not distributed amongst number of individuals. The insurance business in India is under the control of the central government through different types of insurance organizations. There are three main reasons why insurers are important for the stability of the financial system. Life insurance provides financial benefits to a designated person up… It exists due to the distribution of funds contributed by the participants of the insurance company. There are many types of insurance. Think of it as putting all your eggs in one basket and potentially losing them all or, instead, dividing your eggs among several baskets to minimize a loss. Various types of insurance like cattle insurance, crop insurance, and property insurance are available and such insurances promote security, this security is about the life and property, this makes the individual tension free and promotes mental peace in the society, insurance promotes education and advancement and helps the society grow by providing security to the people in the society against the various types of risk which they are exposed to. In insurance premium, amount cannot be withdrawn so the savings remain with the insured to be enjoyed over a longer period of time, the insurance company provide full insurance amount irrespective of the premium deposited like in case of premature death of the insured, full amount is provided to his dependents, in insurance insured is bound to pay the premium so he makes an investment and this will help him in the long run. The function of insurance is to provide indemnity, or reimbursement, in the event of an unforeseen loss or tragedy. THE NEED AND PURPOSE OF INSURANCE FROM THE VIEWPOINT OF BUSINESS AND INDUSTRY, 8. But, the insurance relieves the person from such difficult task. Third, insurers contribute to the safeguarding of the stability of household and firm balance sheets by insuring their risks. The insured gets the amount of insurance at the time of expiry of the policy or due to premature death of the earning member of the family, the insured get the amount of insurance at the time of expiry of the policy or due to his premature death, his family members get insurance amount and this provides safety and security to the insured as well as his family members at the time of loss. such that a house in upmarket Kololo and Naguru hills will be charged fairly lower on the factor of high security as compared to a house in the neighborhood of Bwaise where the chance of theft or burglary is close to 100% in a period of one year. It is the oldest form of insurance organization, the individual insurers, in this case, are known as underwriters or syndicates, if an individual wants to be a member of Lloyd’s association, then he has to deposit a particular amount of fee as security for regular payment of his liabilities. Each of the house owners in the example above would be charged premiums depending on a number of factors that include the location of the house, security systems installed, nature of the contents inside the house, etc. Role of Insurance Companies By Webmaster on September 10, 2013 • ( 0). THE NEED AND PURPOSE OF INSURANCE FROM THE VIEWPOINT OF SOCIETY, INSURANCE COMPANIES AND FINANCIAL STABILITY, Click to share on Facebook (Opens in new window), Click to share on Twitter (Opens in new window), Click to share on Pinterest (Opens in new window), Click to email this to a friend (Opens in new window), Click to share on WhatsApp (Opens in new window), Click to share on Reddit (Opens in new window), Click to share on Telegram (Opens in new window), Fables|Definition, Aesop’s Fables, Major Themes and Style and Language, Short Story|Origin and Development, Short Story as a Literary Form and Characteristics, Summary, Analysis and Important Questions,  of The Duchess of Malfia By John Webster, Summary, Model Explanations and Important Questions of the Play: Dr Faustus, The Prologue To The Canterbury Tales – Summary, Explanations and Questions, The Daffodils By William Wordsworth- Summary and Questions Answers, Quality by John Galsworthy| Summary and Questions, Summary of Appa-Mam and its Questions and Answers, The Star Ducks by Bill Brown Summary, Theme and Question Answers, The White Flower By R.K. Narayan - Summary, Explanations and Question Solutions, Youth and the Tasks Ahead by Karan Singh | Brief Summary and Solved Questions. Insurance is a very complicated and highly regulated industry with many different roles and opportunities for those working within it. Insurers on the other hand, unlike banks, generally, have liabilities with a longer maturity than their assets, which makes them less vulnerable to customer runs. 400 per month as wages. But it provides a... 3] Pooling of Risk. This is because insurers are not as closely interconnected as banks are since they do not directly participate in payments systems. Insurance converts uncertainty into certainty by providing the insurance amount at the time of loss. This does not necessarily, however, mean that simultaneous defaults are less likely to occur in the insurance sector than in the the banking sector, at least not during periods of financial turmoil. It is good where risks are greater at one place and lesser at the other place. The next point is insurance encourages the welfare of the employees; the welfare of employees is the responsibility of the employer because the employees work for the employer. Civil Remedies (Insurance Companies and Insurance Holding Companies) Regulations (SOR/2006-301) Commercial Loan (Insurance Companies, Societies, Insurance Holding Companies and Foreign Companies) Regulations (SOR/2001-368) Complaint Information (Canadian Insurance Companies) Regulations (SOR/2001-373) The roles and responsibilities of an Insurance Agent is multiple. With the advancement in insurance practices, different forms of insurance organizations emerged and these different forms of insurance organizations are self-insurance, individual insurer, partnership, joint stock companies, mutual companies, cooperative insurance organizations, Lloyd’s associations and state insurance. • Insurance contributes to the economic growth of a country when, for instance, the pooled funds are deposited with commercial banks are accessed by borrowers to invest in the economy. One of the main reasons for this view is that insurers are not interlinked to the same extent as banks are, for instance, in interbank markets and payment systems. There are certain insurance policies and annuities available which are useful for the education of the children irrespective of the death or survival of the income earning person or the insured. We need insurance because we are exposed to various kinds of risks and the purpose of insurance is to protect us from the loss caused due to those risks. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. The function of an insurance company is to assess risk and offer policies to provide financial compensation in case of loss or a claim against you. In addition, insurers are not generally seen to be a significant potential source of systemic risk. Insurance companies are essential for the stability of financial systems mainly because they are huge investors in financial markets because there are growing links between insurers and banks and because insurers are safeguarding the financial stability of households and firms by insuring their risks. After the death of the insured, the ritual ceremonies, payment of income and wealth tax is taken care of by the insurance company, so these were the special needs and for the fulfillment of these special needs, multipurpose policies, education, and marriage policy and capital redemption policies are available. Cooperative insurance is a type of insurance that is offered by a group, an organization, or an association. If the income was more than the expenses, then it was used as saving and the premium was reduced in that case. For example, if one purchases health insurance, the insurance company will pay for (some of) the client's medical bills, if any. Insurance is a way or mechanism of transferring the insurable risk to an insurance company for a price called premium such that in the event of a loss, the insurance company will compensate the policyholder (individual or company) as per the terms set out in the insurance contract. Let us continue this topic with the discussion on different types of insurance organizations. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.. An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter.A person or entity who buys insurance is known as an insured or as a policyholder. Insurance is a way or mechanism of transferring the insurable risk to an insurance company for a price called premium such that in the event of a loss, the insurance company will compensate the policyholder (individual or company) as per the terms set out in the insurance contract. The next type of insurance organization is Lloyd’s association, it was named after coffee house of Edward Lloyd, where underwriters assembled to transact business and to pick up news. Post was not sent - check your email addresses! The paper contains three sections. Insurance companies create insurance policies by grouping risks according to their focus. If the insured is unable to repay the amount, then the lender can surrender the insurance policy and get the loan repaid along with the interest. This importance is exacerbated by the fact that banks’ assets (such as customer loans) are mostly long-term in character, whereas their liabilities (such as deposits) are of shorter-term duration. The next point of need and purpose of insurance from the viewpoint of business and industry is insurance provides key man indemnification, key man is the particular man who has the expertise, experience as well as the management skills that makes him the asset for the business, in case if the life of such a person is lost, then the business will lose an asset and at the same time, training and employing a new person in his place will be expensive for the business. When clients purchase insurance, they are put in a pool of other clients who share similar risks. 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