Insurance provides a variety functions which are beneficial to the common man, business community and the nation as a whole, directly or indirectly. A few of them are discussed below.
1. Distributes Risk
Business concerns generally confront the problem of risk. In big concerns, handling of risks becomes a specialized function. Risk and insurance are both intertwined.
Insurance, as a device, is the outcome of the existence of various risks in our day-to-day life. Though it is impossible to eliminate the risks completely, it can however reduce the financial loss caused by risks. Insurance spreads the whole loss over the larger number of persons who are exposed by a particular risk.
2. Helps in judging the viability of major projects
Generally the insurer conducts an investigation of the assets or project as a whole before insuring the same with a view to judge the profitability of the project. Unprofitable projects are denied the benefit of insurance. Hence, management may drop such projects or units in advance in order to prevent losses.
3. Encourages savings
Life insurance is considered as one of the important forms of savings. The premium paid is accumulated and is returned to the assured if he survives till the date of maturity. Certain tax exemptions are given under Sec.80C of the Income Tax Act to infuse the habit of thrift and savings among the masses. Payment of a life policy premium becomes a habit and promotes savings.
4. Promotes Foreign Trade
Foreign trade fully depends on insurance. The banker will not come forward to discount the marine trade bills unless the cargo is fully insured. In India, insurance has been made mandatory for foreign trade. It relieves entrepreneurs &om the uncertainties of foreign trade.
5. Checks Inflation
Insurance plays a key role in checking inflation. It curbs the circulation of money and saves it from its ill effects. Compulsory savings in the form of premium reduces the disposable income of the individual and this scarce source of production is utilized in a better way by investing for the national development.
6. Social Security
Insurance helps in creating awareness among the general public regarding adoption of techniques for minimizing the happening of controllable uncertain events. It has also helped in a greater way by designing various types of insurance in our country like Employees State Insurance Act, Provident Fund Act, Workmen’s Compensation Act, etc.
7. Credit Facilities
Businessmen are able to raise loans from banks and other financial institutions by pledging their insurance policies with them. In case, the businessmen are unable to return the loan amount, the financial institutions can recover their amount out of the policy’s surrender value.