Chapter 1

Insurance – Features, Functions

Features of Insurance

  1. Contract: Insurance is a contract between insurer and the insured. The insured makes an offer and the insurer accepts this offer through the contract. It is always made in writing.
  2. Consideration: Insurance is a contract whereby one party takes over the risk of other party and promises pay a certain sum of money to the insured or to his nominee a certain sum of money on happening of an event for a consideration. This consideration is called premium.
  3. Cooperative endeavor: Large number of persons transfers their risk to an association which is formed for this purpose. So we can say that the insurance is cooperative endeavor of large number of individual who are ready to share risks.
  4. Protection of monetary risks: Insurance covers only monetary risks. That means the risks which can be measured in terms of money.
  5. Good faith: In insurance utmost good faith is required on the part of all parties.
  6. Contract of indemnity: All contract of insurance except life insurance is a contract of indemnity.
  7. Not gambling: It is not gambling because the insurer is assured to get his loss of indemnity if the event concerned is happening.


Functions of insurance can be classified into two namely primary functions and secondary functions.

Primary functions

  1. Providing protection – The most important function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.
  2. Collective risk bearing – Insurance is an instrument to share the financial loss. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid.
  3. Evaluating risk – Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well.
  4. Provide Certainty – Insurance is a device, which assists in changing uncertainty to certainty

Secondary functions of insurance

  1. Preventing losses – Insurance warns individuals and businessmen to hug suitable device to prevent unfortunate after effects of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.
  2. Covering larger risks with small capital – Insurance relieves the businessmen from security investments. This is done by paying small amount of premium against larger risks and uncertainty.
  3. Helps in the development of larger industries Insurance provides an opportunity to develop to those larger industries which have more risks in their setting up.
  4. Provides capital: The insurance provides capital which is essential for the economic development of a nation. The accumulated funds are invested in productive channel.

Other functions of insurance

  1. It is a savings and investment tool – Insurance is best savings and investment option, restricting unnecessary expenses by the insured. People take up insurance as a good investment option and they also select it because they will get tax exemption.
  2. Medium of earning foreign exchange – Any country can earn foreign exchange by way of issue of marine insurance policies and a different other ways.
  3. Risk Free trade – Insurance boosts exports insurance making foreign trade risk free with the help of different types of policies under marine insurance cover.
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