Other Functions

There are indirect functions of insurance which benefit the economy indirectly.

Some of such functions are :

1. Means of savings and investment : Insurance serves as savings and investment.

Insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insureds. For the purpose of availing income-tax exemptions also, people invest in insurance. In the words of Magee “Although investment is not the primary function of insurance. Investment service is proved to be an important benefit of insurance.

2. Source of earning foreign exchange : Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies.

3. Promotes exports : Insurance makes the foreign trade risk free through different types of policies issued under marine insurance cover. In case of loss of cargo and others due to marine perils the insurance company makes good the loss.

4. Provides social security : Through various social protection plans, the insurance provides social security to people. It not only provide security at the time of death but also provides assistance to the insureds at the time of sickness, old age, maternity etc.

3.4 PRE-REQUISITES FOR THE SUCCESS OF INSURANCE

For the successful operations of insurance, certain important factors or requisites are very essential. These are :

1. Presence of a large number of risks.

2. More risks in the life or property of a person so that he may feel necessary to be insured.

3. Probability of real loss on account of risk.

4. Presence of a large umber of people exposed with the same nature and kind of risks.

5. Involvement of loss from the risk must be large enough.

6. The loss from the expected risk should be determinable in advance.

7. The happening of loss/event must be beyond the control of the insured.

8. The loss to all the insureds should not take place at a time. Otherwise, the insurer may face problem in discharging all the claims at a time.

9. The cost of insurance should be feasible. In other words, the premium rates should be reasonable so that large number of people can opt for insurance as a device against risk.

10. The risk insurable should be such to become easier to calculate the actual loss.

3.5 LIMITATIONS OF INSURANCE

In spite of number of advantages of insurance, it has certain limitations. On account of such limitations, the benefits of insurance could not be availed in full. These limitations are :

1. All the risk cannot be insured : All the risk cannot be insured; only pure risks can be insured, and speculative risks re not insurable.

2. Insurable interest (financial interest) on the subject matter : Insurance is possible only when the insured has insurable interest in the subject matter of insurance either at the time of insurance or at the time of loss, or at both the times;

in the absence of which the contract of insurance becomes void.

3. Impossibility of measurement of real loss : In case the loss arisen from the happening of the event cannot be valued in terms of money, such risks are not insurable.

4. Not possible to insure the risk covered by a single individual or a small group:

Insurance against the risk of a single individual or a small group of persons are not advisable since it is not practicable due to higher cost involved.

5. Higher premium rates : Another important limitation is that the premium rates are higher in our country and as such, certain category of people cannot avail the advantage of insurance. The main reason for the higher rate of premiums is the higher operating cost.

6. Moral hazards : It becomes difficult to control moral hazards in insurance. There are certain people who misutilize the insurance plans for their self-interest by claiming false claims from insurance companies.

7. Certain rights cannot be insured by private insurers : The private insurers are not permitted to insure certain specified types of risks like unemployment insurance, bankruptcy of banks insurance, etc.

8. Unattractive investment : Insurance is not a profitable investment. Its main object is to provide security against risks. Insurance business cannot be a source to acquire profits.

9. In certain cases cooperation of government is necessary : Certain specified risks can be insured with cooperation of the government only; such as unemployment insurance, insolvency of banks, food insurance, etc.

10. All the pure risks are not insured : All the pure risks are not insured by the insurer. Even if does with higher rate of premium only. For example, insurer does not take any interest to accept a proposal of a person whose heart surgery has gone through.

3.6 SCOPE OR CLASSIFICATION OF INSURANCE

Broadly, insurance may be classified into the following categories : I. Classification on the basis of nature of business

II. Classification from business point of view III. Classification from risk point of view I. On the basis of nature of business

On the basis of nature of business, insurance may be the following types : 1. Life Insurance

2. Fire Insurance 3. Marine Insurance 4. Social Insurance, and 5. Miscellaneous Insurance

1. Life Insurance : Life insurance may be defined as a contract in which the insurer, in consideration of a certain premium, either in a lump sum or by other periodical payments, agrees to pay the assured, or to the person for whose benefit the policy is taken, the assured sum of money, on the happening of a specified event contingent on the human life.

A contract of life insurance, as in other forms of insurance, requires that the assured must have at the time of the contract an insurable interest in his life upon which the insurance is affected. In a contract of life insurance, unlike other insurance, interest has only to be proved at the date of the contract, and not necessarily present at the time when the policy falls due.

A person can assure in his own life and every part of it, and can insure for any sum whatsoever, as he likes. Similarly, a wife has an insurable interest in her husband and vice-versa. However, mere natural love and affection is not sufficient to constitute an insurable interest. It must be shown that the person affecting an assurance on the life of another is so related to that other person as to have a claim for support. For example, a sister has an insurable interest in the life of a brother who supports her.

A person not related to the other can have insurable interest on that other person.

For example, a creditor has insurable interest in the life of his debtor to the extent of the debt. A creditor can insure the life of his debtor upto the amount of the debt, at the time of issue of the policy.

An employee has an insurable interest in the life of the employer arising out of contractual obligation to employ him for a stipulated period at fixed salary. Similarly, from an employer to the employee, who is bound by the contract to serve for a certain period of time.

2. Fire Insurance : A fire insurance is a contract to indemnity the insured for distribution of or damage to property caused by fire. The insurer undertakes to pay the amount of the insureds loss subject to the maximum amount stated in the policy. Fire

insurance is essentially a contract of indemnity, not against accident, but against loss caused by accident. It is becoming very common in fire insurance policies to insert a condition, called the average clause, by which the insured is called upon to bear a portion of the loss himself. The main object of this clause is to check under-insurance and to encourages for full insurance. It impress upon the property-owner for the need of having his property accurately valued before insurance.

Regarding insurable interest, the insured must have insurable interest in the subject matter both at the time of affecting the policy and at the time of loss. The risk in fire insurance policy commences from the moment of cover note, or the deposit receipt, or the interim protection is issued, and continues for the term covered by the contract of insurance. It may even date back; if the parties so intend. The rate of premium varies to the degree of hazard or risk involved.

3. Marine Insurance : A contract of marine insurance is an agreement whereby the insurer undertakes to indemnity the assured in a manner and to the extent thereby agreed, against marine losses, that is, the losses incidental to marine adventure. There is a marine adventure when any insurable property is exposed to marine perils. Marine perils also known as perils of the seas, means the perils consequent on, or incidental to, the navigation of the sea or the perils of the seas, such as fire, war perils, pirates, robbers, thieves; captures, jettisons, barratry and any other perils which are either of the like kind or may be designed by the policy.

There are different types of marine policies known by different names according to the manner of their execution or the risk they cover. They are : voyage policy, time policy, valued policy, unvalued policy, floating policy, wager or honour policy.

4. Social Insurance : Social insurance has been developed to provide economic security to weaker sections of the society who are unable to pay the premium for adequate insurance. The following types of insurance can be included in social insurance:

(i) Sickness Insurance : In this type of insurance medical benefits, medicines and reimbursement of pay during the sickness period, etc. are given to the insured person who fell sick.

ii) Death Insurance : Economic assistance is provided to dependants of the assured in case of death during employment. The employer can transfer his such liability by getting insurance policy against employees.

iii) Disability Insurance : There is provision for compensation in case of total or partial disability suffered by factory employees due to accident while working in factories. According to Employees Compensation Act, the responsibility to pay compensation is vest with the employer. But the employer transfers his liability on the insurer by taking group insurance policy.

iv) Unemployment Insurance : In case insured person becomes unemployed due certain specific reasons, he is given economic support till he gets employment.

v) Old-age Insurance : In this category of insurance, the insured or his dependents is paid, after certain age, economic assistance.

For the last few years, the Indian Government has extended the scope of Social Insurance. Under the concept of social justice, this scheme now extended to Daily-wages earners, Rickshaw pullers, Landless labourers, Sweepers, Craftsmen, etc. through different insurance plans.

5. Miscellaneous Insurance : The process of fast development in the society gave rise to a number of risk or hazards. To provide security against such hazards, many other types of insurance also have been developed. The important among them are :

(i) Vehicle insurance on buses, cars, trucks, motorcycles, etc. and made compulsory so that the losses due to accidents can be claimed from the insurance company.

(ii) Personal accident insurance by paying an annual premium Rs.12 on policy worth Rs.12,000. In case of accidental death or total/partial disability, a fixed amount as per conditions of insurance, is paid to the insured.

(iii) Burglary insurance -- (against theft, decoity etc.)

(iv) Legal liability insurance (insurance whereby the assured is liable to pay the damages to property or to compensate the loss of personal injury or death.

This is in the form of fidelity guarantee insurance, automobiles insurance and machines etc.)

(v) Crop insurance (crops are insured against losses due to heavy rains and floods, cyclone, draughts, crop diseases, etc.)

(vi) Cattle insurance (Insurance for indemnity against the loss of cattle from various kinds of diseases).

In addition to the above, insurance plans are available against crime, medical insurance, bullock cart, jewellery, cycle rickshaw, radio, T.Vs., etc.