Functions and Importance of Insurance

Insurance performs several genuine economic and social functions beyond simply compensating an occasional unlucky policyholder:

• Provides certainty and security. Insurance converts an uncertain, potentially ruinous financial loss into a small, certain, budgeted annual cost (the premium), letting individuals and businesses plan ahead with confidence.
• Spreads risk across many people (risk-pooling). Rather than one unlucky business bearing an entire loss alone, the financial burden is spread across every policyholder who paid a premium into the common fund, only a few of whom will actually claim in any given period.
• Encourages trade, investment and entrepreneurship. Knowing that a genuinely catastrophic loss (fire destroying a factory, a ship sinking with its cargo) can be financially absorbed, businesses are willing to undertake risk-bearing ventures — building factories, shipping goods overseas, extending trade credit — that they might otherwise avoid.
• Mobilises savings and channels them into investment. Especially through life insurance, premiums collected from millions of policyholders accumulate into very large funds, which insurance companies (like LIC) invest in government securities, infrastructure and industry, making insurance a significant source of long-term investible capital in the economy.
• Provides social security. Life and health insurance give a family some financial protection against the premature death or illness of an income-earning member, reducing dependence on the extended family or the State in such situations. …