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iv. Maintains Economic Stability
Risk and uncertainty push the business sectors towards a fear, which declines
the performance efficiency, and ultimately it leads the entire business sectors towards
instability. An insurance company tries to maintain economic stability by compensating
the financial losses of the businessmen and entrepreneurs who propose to ensure their
property and also encourage the others to do so by motivating them duly. Insurance
assures the compensation of every sort of economic loss, and saves them from economic
crises due to such losses and maintains economic stability.

v. Encourages Saving Habit
In life insurance, insured person or customer has to pay compulsory premium
amount to the insurance company. Insurance company compensates the amount against
the risk and uncertainty for which insured have to pay premium. That premium will be
returned after the completion of certain period with bonus. For the payment of premium,
insurance company encourages the saving habit.

vi. Helps in Foreign Trade
In foreign trade, goods are transported through waterway and airways. While
transporting, there are various risks an goods in transit. The insurance helps in
minimizing all such risks of financial losses assuring him to make financial compensation
in consideration of insurance premium. It makes the import and export trade riskless and
convenient which enhances foreign trade.

Points to Remember

A. Primary Functions i. Providing assurance for compensation
ii. Distribution of risk iii. Financial security
B. Secondary Functions i. Mobilisation of capital ii. Promotes other business
iii. Reduction of risk iv. Maintains economic stability
v. Encourages saving habit vi. Helps in foreign trade

22. Importance of Insurance

Insurance has become a business in the present day world and thus many companies
are established for conducting insurance business. The development of insurance business
in the world has proved its importance. Insurance provides benefits to an individual,
family businessman as well as society. The important advantages of insurance are
discussed below:

i. 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.

86 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 87