Risk cannot be eliminated completely. Rather it can only be minimized through provision of financial compensation to the insured that suffers the loss. This can either be individual or business organisation. For example, a man can take up educational endowment policy for his child so that the education of such child will not be jeopardized even if the man loses his job or is struck by death. An organisation that insured itself against fire or theft will continue to exist in the event of any of the insured perils and the society at large will benefit from the existence in the business. The roles played by insurance in the society are classified into primary and secondary functions.
PRIMARY FUNCTIONS OF INSURANCE
1) Risk transfer: This is the basic reason behind insurance contract. It is a way by which insurers agree to carry the financial burden of the insured in the event of loss or damage of the subject matter of the insurance. For the insurer to be able to accept the financial burden, the insured pays an amount called premium into the fund managed by the insurer. Insurance is a means by which an individual or business organisation can shift some uncertainty of life on the shoulder of others by payment of the little amount called premium. The payment of premium by the insured makes it possible for him to enjoy the benefit of compensation from the fund if he suffers loss and if he is covered under the fund paid. In essence, the insured has transferred the loss that could be suffered under the insured risk to the fund created by him and others.
2) Common pool: Through insurance, people with common risk come together and contribute what is known as premium so that in the happening of loss, whosoever suffers the loss shall be compensated. That is to say, it involves payment of consideration into a particular fund created by the insurers for the policy holders of common risk. Claim settlements are made from the fund depending on the class of the insurance involved. This means people with fire risk contribute to fire fund while people with life risk contribute to life fund and claim in respect of fire insurance are settled from premium paid into fire insurance fund by the policy holders.
3) Equitable premium: Insurance ensures that premium paid into the fund by the policy holder corresponds to the expected share of financial loss of the involved party. The premium to be paid by each policy holder depends on the value of risk introduced into the fund. Premium to be charged by the insurer will be based on degree of the potential loss. For instance, a 55-year old man is prone to death than a 35-year old man. Likewise, a 50-year old Nigerian is not exposed to the same degree of risk in terms of death compared to a 50-year old American because of differences in environment. Also, the premium to be charged in respect of vehicles used for commercial purpose will be higher than that of vehicles used for private purposes, because vehicles used for commercial purpose will always be on the road unlike private vehicles and are more prone to accident and theft. The owner of a fenced building will contribute less premiums compared to the owner of unfenced building in the sense that unfenced building is easily accessible to armed robbers than fenced buildings. Therefore, the amount to be charged by the insurer must be commensurate to the risk present to the fund.
In summary, the primary function of insurance is to provide risk transfer mechanism by means of common pool into which each policy holder pays a fair and equitable premium according to the type of risk introduced into the pool.
SECONDARY FUNCTIONS OF INSURANCE
1) Loss prevention: Insurance warns individuals and business owners to embrace appropriate device to prevent unfortunate aftermath of risk. It has been said that risk is not eliminated totally, but it can be prevented from happening if necessary steps are taken from the early stage. Insurance experts, if consulted, will advise individuals or enterprises on how to prevent loss from occurring. For example, a theft surveyor, if consulted recommends against thefts through installation of anti-theft devices, which will deter casual thieves. Also, liability surveyors will advise the business owner or employer on ways to prevent claims from public, due to their operation or products, or from employee, due to unsafe condition of work.
2) Security: Insurance provides security to the owner or management of a firm which would have been a source of worry to him, over the effect of some loss or damages that the business is exposed to. The confidence is there following the decision of the owner to participate in risk transferring system by contributing into the insurance funds against risk that could affect the successful operation of the organization which might make it difficult for the organization to achieve its objectives and goals. It gives room for the business owner to use his time for other things that would be of benefit to the organisation. For example, there will be thought about how to replace company vehicle damaged or stolen on official duties or the thought about employee sustaining injuries that would lead to permanent disability or his death. That would have been completely removed from the mind of the management with the purchase of insurance policies.
3) Loss control: This deals with the method of limiting or controlling the loss following the happening of the insured events. The role of surveyors described above does not involve loss prevention only but also loss controlling. For example, the installation of anti-theft device as recommended by surveyors may not still prevent some criminals but can make it difficult for the criminal to operate successfully which will reduce the number of stolen items.
The fire officers’ committees of Nigeria Insurance Association (NIA) spelt out the following rules and regulations which made it possible to contain for sufficient time, fire outbreak to enable the public fire service to extinguish the blaze before it becomes a major disaster:
- Construction of buildings.
- Design of fire doors.
- Sprinkler installation.
- Fire alarm system.
The use of independent loss adjuster is to investigate the cause of a loss and establish the actual value of the loss. It assesses those factors responsible for the loss and takes step in minimizing further loss. The expert contributes greatly to the limitation of the loss by knowing how best to get a business on its feet again quickly, where to purchase or hire temporary plant, where to dispose salvage at the best price, etc.
4) Stimulus to business enterprise: Insurance helps in stimulating business by making available the fund forinvestment in the production side of the business. That is to say, the funds that would have been set aside to reduce the effect of financial loss if not insured would be used for further investment. A firm may set aside some fund to meet up with some unfortunate situations that might arise. This fund could be invested within the organisation and the return on investment of the fund will be an added advantage to the organisation.
BENEFITS OF INSURANCE
The following are the benefits of insurance to individuals, society and business organizations:
- Employment opportunity: Insurance companies no doubt have provided jobs for thousands of people. In Nigeria at present, there are about 130 insurance and reinsurance companies, over 450 insurance brokers and thousands of agents. The offices mentioned above are being run by human beings working with their mental and physical energies. Apart from the direct jobs provided by insurance companies, insurance has also provided jobs for other professionals like lawyers, bankers, auditors and so on. Insurance indeed has contributed greatly in solving unemployment problem in Nigeria.
- Promotion of savings: Saving is a device for preparing for lean times in the future. Insurance policy is a very suitable way of providing for the future. This type of policy is found particularly in life assurance. It promotes savings by making it compulsory and it has a beneficial effect for both the individual and nation.
- Income and profit to the shareholders: It is important for any company to place much emphasis on profit generation. These profits are given as dividend to the share holders of the company. Insurance companies are also in this category. Some insurance companies in Nigeria have been declaring huge profits and dividends for their share holders as a proof of successful business activities.
- Correct distribution of cost: Insurance helps to maintain correct distribution of cost. Every business man tries to pass on to the consumer all typesof costs including accidental losses. In the various fields of insurance, such losses are correctly estimated, keeping in view a vast number of factors bearing on them. In the absence of insurance, these losses and costs would be assessed and distributed only by guess work.
- Source of credit: Modern business depends largely on credit; insurance has contributed a lot in this regard. A life insurance policy increases the credit worthiness of the assured person because it can provide funds for repayment if he dies. Credit extension is also obtained by means of various kinds of property insurance. A businessman whose stock of goods has been properly insured can get credit easily. Similarly marine insurance is an essential requirement for every transaction of import and export.
- Provision of welfare and social benefits: Insurance serves as a useful device for solving complex social problems. The core benefit of life assurance is to protect the financial interest of one’s family in case a policy holder becomes critically ill or is deceased. Once a person passes on regardless of age, there are tons of potential final expenses that life assurance can cover.
- Productive utilization of funds: Insurer accumulates large resources from the various insurance funds. Such resources are generally invested in the country, either in the public or private sector. This facilitates considerably the overall development of the economy.
- Insurance as an investment: A life policy is a combination of protection and investment which serves a useful purpose. The premium that the insured pays go on accumulating in a fund every year. The sum so accumulated by the insurance company earns interest. Under life assurance a person may also invest his capital in annuity which will pay him an income every year till death. Therefore, insurance may be regarded as an investment.
- Promotion of international trade: The growth of the international trade of the country has been greatly helped by shifting of risk to insurance companies. A ship sailing in the sea faces some misfortune. A fire breaks out and burns to ashes all the merchandise of a business man. But insurance is one of the devices by which these risks may be reduced or eliminated. As such, industrialists and exporters may devote their full attention toward the promotion of business which may increase the export activities.
- Favourable allocation of factors of production: Insurance also helps in achieving favourable allocation of the factors of production. Capital is usually shy in the risky business. People hesitate to invest their capital where financial losses are great. If protection is provided against these risks by means of insurance, several investors will be ready to invest their funds in those fields.
- Growth of business competition: Insurance enables small business units to compete upon more equal terms with bigger organizations. Without insurance it would have been impossible to undertake the risks themselves. On the other hand, bigger organizations can absorb their losses due to great financial strength. Moreover,insurance removes uncertainty of financial losses arising out of the certain causes. It thus increases knowledge which is one of the most important preconditions for perfect competition.