Page 87 - Account 10

ii. Reduction of Risk
Human beings are exposed to different kinds of risks 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 co-operate each other to compensate the losses in
monetary turns 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. It reduces risks of an
individual.

iii. Encouragement to Saving
The insured has to pay a certain regular premium to the insurer in return of the
compensation of the probable future loss of life or property. It is, thus, a method of
collecting saving by assuring their protection against certain losses, it encourages their
persons and firms to make regular saving even in small extents.
iv. Basis of Credits
An insured can get loan easily by pledging insurance policy as a security. Besides,
financial institutions easily grant credit facilities on the pledge of those properties which
are being insured.
v. Promotes Other Business
Business is 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 expend business activities in and outside a country.

vi. Maintains Economic Stability
Risk and uncertainty push the business sectors toward a fear which declines the
performance efficiency and ultimately it leads the entire business sectors towards
instability. Insurance company tries to maintain economic stability by compensating
the financial losses of the businessman and entrepreneurs who propose to ensure their
property.
vii. Providing employment opportunity
Hundreds of entrepreneurs are engaged in insurance business. In the present day
business world, it is developed as a business organization in the form of company to
satisfy the requirements of the persons and firms engaged in different occupations. Thus,
by establishing and developing insurance business companies, it provides employment
opportunities to the country people.

23. Disadvantages of Insurance
In spite of a number of benefits, insurance has also some limitations or drawbacks.
The notable limitations of insurance are mentioned below:
i. Insurance leads to negligence as the insured feels that he/she can be compensated
for any losses or damages.

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