Functions of Insurance and Kinds of Insurance: Life, Fire, Marine and Motor Vehicles Insurance.7 min read

BY- AAKANSHA RAJGADIA

Introduction.

Life is uncertain. There is no guarantee that there will be no unexpected loss or damages in business. In such a situation insurance protects our business against all risks. Insurance is defined as a contract, which is called a policy, in which an individual or organization receives financial protection and reimbursement of damages from the insurer or the insurance company. In short, it is some kind of protection from any unexpected loss or damage.

The basic principle of insurance is that an entity will choose to spend small periodic amounts of money known as premium, against a possibility of an unexpected loss or damage. Any loss that is suffered by the insured will be paid out of the premiums which he paid.

Functions of Insurance.

Insurance is a method to provide security against the losses suffered by the insured. The functions of insurance can be classified into two: Primary functions and Secondary functions.

Primary functions of Insurance

  1. Certainty.

Insurance gives certainty of payment when unexpected loss occurs to the insured.

When we are not insured, we remain uncertain about our capability to face the future risks, insurance converts this uncertainty into certainty of bearing future risks.

  • Protection.

Protecting the probable chances of loss is one of the main functions of insurance. The time and amount of loss are uncertain and at the happening of risk, the person will suffer the loss in the absence of insurance. It guarantees the payment of loss and thus protects the assured from sufferings. The insurance cannot check the happening of risk but can provide for losses at the happening of the risk. On feels contended because it is sure that the insurance will help at times of risks.

  • Risk-Sharing.

The loss arising from risk is uncertain. When risk arises, the loss is shared by all the persons who are exposed to it. All the policyholders pay their premiums, but all of them are not subjected to the loss every year, if one of them suffers a loss, then the loss is recovered from this fund. Hence, the risk is shared between all policyholders.

Secondary functions of Insurance

  1. Prevention of loss.

Prevention is better than cure, hence it is better to adopt preventive measures against unexpected losses to prevent the losses. Every insurance prescribes various preventive measures such as installation of safety devices like CCTV, smoke detector, fire extinguisher, burglar alarm, etc. If such type of preventive measures exists, the insured has to pay lesser premium as the rate of risk is low.

  • Provides capital.

It provides capital to the society. The accumulated funds in form of premiums of the policyholders helps the insurance company to create capital which then can be invested in productive purposes that generate income for the company. The insurance relives a businessman from security investments by paying small amount in the shape of premium against larger risks and uncertainties. This alleviates the businessman from security investments for a small amount of premium against larger losses.

  • Improves efficiency.

It helps to improve the efficiency of the policyholders as it eliminates the distress and worries of losses. The carefree person can devote his body and soul together for better achievement, it improves not only his efficiency but the efficiencies of the masses are also advanced.

  • Helps in economic progress.

It protects society from huge losses of damage, destruction, and death, providing an initiative to work hard for the betterment of the masses. The next factor of economic progress, the capital, is also immensely provided by the masses. The property, the valuable assets, the man, the machine, and the society cannot lose much at the disaster.

Kinds of Insurance: Life, Fire, Marine and Motor Vehicles Insurance.

  1. Life Insurance

Life Insurance/ Assurance is a contract between the policyholder/ assuror and the insurance company, by which the insurer provides a service to pay the person for whose benefit the cover is made, or to his personal representative, a certain sum of money on the happening of the given event, or on the death of the person whose life is assured. Providing some financial aid and help to the beneficiaries of the deceased person is the main purpose of Life insurance. The name of the beneficiary is mentioned in the contract. Thus, it guarantees compensation for loss of life in return for payment of a specified premium, which is generally paid on an annual basis. The amount of premium depends on factors like the health of the policyholder, occupation, medical history, etc.

Life insurance is concerned with two hazards that stand across the life-path of every individual:

  1. The premature death of the policyholder, leaving a dependent family to fend for itself.
  2. Living till old age without any means of financial support.

Life insurance is saving as well as investment. By taking a this policy one feels a sense of security.

The main two types of life policies are – Term Policy and Whole Life Policy.

A term policy provides a fixed amount of money on death during the period of contract. It provides protection for a fixed term (period of years) only. This policy is based on the principle, “No loss, no claim”, which means, this policy turns out to be beneficial only on the occurrence of the event. If the insured dies during the term, the beneficiary can claim the money and if the insured survives the term, then no claim can be made, the whole premium will be forfeited.

On the other hand, The Whole Life Policy will pay out a fixed amount whenever the policyholder will die. As the name suggests, this policy is intended to provide Life insurance protection over one’s lifetime.

  • Fire Insurance

Fire Insurance is a contract between the insurer and the policyholder. This covers the loss or damage caused to any property in a fire accident within the specified time period. It not only covers the risks of fire but the consequential losses from such fire are also covered to the extent of the damages up to the insured amount, if exceeds then the company is not liable for the excess amount. The policyholder has to pay an annual premium mentioned in the contract. Thus, it gives protection against any damage caused by fire.

The policyholder must have an insurable interest in the property that is being insured and he must disclose all facts about the property, its construction, etc. to the insurer in good faith. The insurance company can terminate the policy if it later finds that the policyholder withheld information.

  • Marine Insurance

Marine Insurance is the oldest form of insurance and it covers all the marine perils. It is a contract by which underwriters engage to indemnify the owner of a ship, cargo, or fright against losses from certain perils or sea risks to which their ship or cargo may be exposed. The perils of sea or sea risks are fire, attack by enemies, pirates, thieves, jettison, barratry, collision, etc. Due to such perils the ships are damaged or destroyed, also there is loss of cargo and consequently loss of the freight. Many other financial losses are also covered under this insurance as losses occurred due to natural disasters, such as storms or hurricanes.

It is usually meant for sea transport and shipping corporations and provides insurance to ships and the cargo carried by them. This covers damage suffered by the ship or the cargo of the ship during the voyage or at any point between the start and end of the journey.

  • Motor Vehicles Insurance

It is related to all types of motor vehicles-motorcycles, cars, jeeps, commercial vehicles, etc. It gives protection to the owner of the vehicle against damages to the vehicle and pays off the third-party liability as mentioned in the law against the vehicle owner. Third-party insurance is a statutory requirement and the vehicle owner is legally bound to pay for the injury or damage that is caused by him to the third party. A yearly premium is to be paid by the policyholder.

This insurance is made mandatory by the government, driving a motor vehicle without insurance in a public place is a punishable offence as per the Motor Vehicles Act, 1988.

The two policies that offer motor insurance cover are as follow:

  1. Liability Only Policy (statutory requirement)
  2. Package Policy (liability only policy + damage to owner’s vehicle usually called O.D cover)

The damages to the vehicle covered under the OD section of the Motor Insurance policy are fire, explosion, self-ignition, lightning, burglary/ theft, riot and strike, earthquake, flood, storm, cyclone, hurricane, etc., accidental external means, malicious act, terrorism acts, while in transit by rail/road, inland waterways, etc., Landslide/ rockslide.

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