Page 85 - Account 10

A. Primary Function

i. Providing Assurance for Compensation
It is a very important function of insurance to assure for the compensation of pre-
decided but accidental loss. The person or party pays certain specified fees, known as
premium to the insurer, periodically, to such assurance of compensation of the probable
losses. Thus, insurance gives a feeling of security against a probable loss caused by risk
and uncertainty.

ii. Distribution of Risk
Human beings are exposed to different kinds of risk which may cause financial
losses. It is not possible to eliminate risk and uncertainty completely but insurance can
reduce the risk by sharing the losses caused by such a risk to a group of persons who
have agreed to join the common pool. They cooperate each other to compensate the losses
in monetary terms from out of the fund of that common pool. Thus, by sharing the risk
of an individual entity to a number of persons in the common pool reduces risks of an
individual.

iii. Financial Security
Insurance provides financial security to an insured. It guarantees protection against
uncertain and large losses in return of small premium. There are different types of
insurance to give economic protection in different sectors. Insurance provides certainty
of compensation in case of accidental loss. Thus, it gives a feeling of financial security
against the possible losses caused by the uncertain events.

B. Secondary Functions
i. Mobilisation of Capital
It accumulates fund in terms of insurance premium from the persons willing to
get secured from the financial risks and uses this fund to compensate the insured that
are actually suffered from the pre-decided but accidental losses. It does not pay the
compensation to all who do not suffer from losses. So, it mobilises such unused fund as
short term, mid term and long term investment in productive sectors.
ii. Promotes Other Business
Business sectors are more risky. The chances of fire in the godown or production
unit, loss by accident or theft, sea perils and the explosion in the aviation etc. are more
frequent in the business sectors. Insurance takes away these risks and promotes and
develops business sectors. Thus, it helps to expand business activities in and outside a
country.
iii. Reduction of Risk
Insurance company does researches and investigations to forecast the future loss. It
organizes different seminars and workshops to make their customers aware of different
risks or events, which help to reduce loss.

84 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 85