Insurance: Functions of insurance and Benefit of Insurance
Arjun EP
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What is insurance?
Insurance is a mode to transfer loss to insurance company.
To be secure from loss, insurance policy must be taken.
To take insurance policy a person or organization must pay money in advance.
This money is called insurance premium.
In 17th century, the Rig-Veda shows some portion of insurance.
The first insurance company in the world was “Insurance Office for Houses” which was formed in Charles Town, South Carolina, USA.
In Nepal, first insurance company was “Nepal Mal Chalani Tatha Bima Company” which was established in 2004 BS.
It was the first mile-stone insurance business in Nepal. Its authorized capital was Rs 500,000 (five lakh).
This insurance company was converted into “Nepal Insurance and Transport Company (P) Ltd in 2016 BS.
It was non-life insurance company.
After re-establishment of democracy, the Government of Nepal (old name His Majesty’s Government) has opened business for private sector.
At present, all insurance companies are running-on according to Nepal Insurance Act 2049 BS.
There are 40 insurance companies in Nepal upto 15 July 2020; out of them 19 life, 20 non-life insurance and 1 is reinsurance company.
Keep in Mind (KIM)
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Rastriya Beema Sansthan works both life and non-life insurance. |
Beema Samiti
The word ‘Beema’ means ‘Insurance’ and ‘Samiti’ indicates ‘Board’.
Beema Samiti (Insurance Board) is the Insurance Regulatory Authority of Nepal.
Insurance Board is constituted to systematize, regularize, develop and regulate the insurance business.
It is established under Insurance Act 1992 (Beema Ain 2049).
This board looks after all the insurance related activities in Nepal.
As a regulatory body, main concern is to create a professional, healthy and developed insurance market in Nepal.
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Benefit of Insurance
In modern world of business, the values of assets are very expensive.
These assets may be loss by fire, theft or accident etc.
To save property from loss, assets must be insured.
For insurance, we must pay insurance premium.
Generally, insurance has universal rule but according to value and life of assets, its premium may be different from one insurance company to other insurance company.
The main benefits of insurance are as follows:
Protection of losses
Insurance provides protection against the possible uncertain events like losses due to fire, flood, thunder etc.
The insurance company provides compensation for losses.
Losses effect to all
Limited company is run-on by more people.
Amount is collected from shareholders.
If company faces loss, it effects to all the shareholders.
When company gets insurance policy, losses can be controlled.
Saving
Non-life insurance is expensive but life insurance is saving for organization and people.
For life insurance, it is insisted saving.
People can save money for future sake by investing monthly, quarterly, half-yearly or annual.
Investment opportunity
Insurance helps to invest little amount as investment.
When we deposit money into bank, we will receive only interest.
But, insurance not only provides investment opportunity but also safety for life.
Employment opportunity
Insurance business in run-on by insurance agents.
There are 25 insurance companies in Nepal.
They have several branches in different place.
In different offices, lots of people do the work.
Therefore, insurance company provides employment opportunity.
Promoting social welfare
Most of the insurance company helps to orphan house, old-age house, community, school, flood victim etc as donation or charity.
Thus, insurance company helps to society.
Types of Insurance
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Individual |
Business |
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Life insurance |
Workers’ compensation insurance |
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Health insurance |
Automobile insurance |
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Disability insurance |
Property insurance |
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Homeowner’s insurance |
Malpractice insurance |
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Automobile insurance |
Business interruption insurance |
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Travel insurance |
Liabilities insurance |
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Other liabilities insurance |
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Or
Types of Insurance
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Life Insurance |
Non-life Insurance |
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Term life |
Motor insurance |
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Money back policy |
Fire insurance |
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Disability insurance |
Home insurance |
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Unit-linked insurance |
Health insurance |
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Pension plan |
Travel insurance |
Functions of insurance
There are different types of insurance functions. According to term and category, they can be separated into three categories; they are:
Primary function
Secondary function
Other function
(A) PRIMARY FUNCTIONS
As its name indicates, primary function means basic function.
The insurance business (function of insurance) is depended on primary functions; it includes following topics:
Provide protection
Insurance provides protection to future risk like loss by fire, loss by accident, loss by natural disaster etc.
Some natural disasters are flood, tsunami, and thunder.
Bearing risk
Insurance company bears/takes risk of insurer after taking insurance premium.
All business is done for profit motive.
Therefore, insurance company also takes premium from more insurers and bears loss of few insurers.
Assessment of risk
Assessment means to collect information about the risk by probability.
From the probability, insurance company estimates mortar rate (death rate) of insurer person.
Provide certainty
Insurance company provides certainty from uncertainty.
Life, goods and assets are always on risk. Insurance company helps to reduce risk.
(B) SECONDARY FUNCTIONS
Secondary means depends on first or primary.
It helps to primary functions; the main secondary functions are given below:
Protection from losses
When a person or organization pays insurance premium for insurance company, insurance company prevents loss of person or organization.
As much as insurance premium is higher, risk factor is also higher.
Small premium for large risk cover
Insurance company receives small premium amount each year for large insurance cover.
This premium may be yearly, half-yearly, quarterly or monthly.
Insurance company pays large compensation amount to insurer if accident or loss occurs.
Development of industries
Insurance company is also financial intermediator.
Therefore, it provides loan to industries.
After taking loan, industries can develop production factor as well as service factor.
(C) OTHER FUNCTIONS
It is the last function of insurance.
It is depended on primary and secondary function; it has following functions:
Saving and investment
Insurance company helps or serves to saving small amount as investment.
Premium is paid yearly, half-yearly, quarterly or monthly in small amount.
This small amount becomes large investment after some years.
Sources of earning foreign currency
If there is international airport in any country, international flights arrives and they pay lending fees, insurance charge etc in foreign currency through insurance.
Therefore, it helps to earn foreign currency.
Risk free trade
All import and export business require insurance.
While sending/forwarding goods, insurance is required.
Insurance company covers the risk.
Therefore, businessperson can do risk free trade.
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