The primary use of modern insurance business centers on insuring public needs for financial security. In other words, the insured desires to be compensated for his financial losses arising from insured events, for instance, a person who has insured his residential house against fire perils contracted to receive a sum insured or its equivalent if the insured events happen as defined in the insurance policy.
The policyholder or insured is not assured that his house could not be lost to fire perils rather he is promised the sum insured or its equivalent should the insured events occur.
The term its equivalent refers to any other methods accepted for compensating the insured by the insurer in lieu of the sum insured equates to the sum insured’s equivalent.
In this chapter, the importance of modern insurance is
generally discussed to make a positive case for the very important role the
insurance is expected to play in a modern economy like Nigeria.
Primary Function of Modern Insurance.
Households, corporate organizations, governments and general insuring public have legion of objectives for insurance protection. No matter the reasons of any, and irrespective of the type of insurance a person desires to contract, the primary function of insurance remains providing financial security or insurance guarantee to the policyholder.
Therefore, the prime
object of insurance is to pay a sum insured or compensate an individual insured
for his financial loss resulting from the occurrence of the insured events
within the contractual stipulations. To put it differently, for the payment of
a premium by a policyholder, an insurer undertakes to pay the sum insured or
its equivalent to a policyholder on the happening of the insured event as
stipulated in the policy conditions.
Secondary functions of modern insurance.
The secondary functions of modern insurance which are of
significance to modern insurance business are numerous. Some of them are
highlighted follows:
1. It encourages effective utilization of financial resources: Many investors and industrialist would not be so keen in making substantial investments especially on risk-prone investment outlets without adequate guarantee and protection against risk of financial loss.
Though some investors have preference for risk and others risk neutral, they are generally risk-averse, conservative and cautious to invest substantial financial resources in any project. If investors do not make good use of financial reserves for fear of financial losses, economic activities may remain subsistence and local, and of course, standard of living will remain low.
The insurance industry does package insurance policies good enough to meet the insurance needs of various investors, thereby offering the financial security needed for investing substantial sum of money in any project. There are Fire Policy, Marine-cargo Policy, Oil and Aviation Policies Engineering and Plant Policies, Contractors’-all-risk Policy, Product Liability Policy and so on.
These
insurances designed for various insurance needs of investors and industrialists
inspire them to untie and utilize their financial reserves from economic
development.
2. It stabilizes social life: Insurance function induces stability in the social life of a nation when it pays the sum insured or indemnifies the insured who suffers financial loss arising from the happening of any insured event, take for instance, a premature death of a breadwinner could bring about wants and distress on his dependents if there are no other sources of income.
An adequate life assurance contract for reasonable sum assured would provide the financial reliefs the dependents needed, and invariably reduce their state of distress. Even where the life assured survives the insurance period, the maturity claim payable could be utilized to solve some economic problems or create a kind of perpetual earning capacity via appropriate investment.
Generally, social vices increase with increase in the poverty level of a society. Society has always acted to reduce the distress on the decayed person; aged, children, the unemployed, and the disabled when it agrees on social security system, to be our brothers’ keeper and to create job opportunities.
With modern insurance paying the sums insured or indemnifying
the policyholders who suffer financial losses arising from the insured events,
the social equilibrium of the society is maintained. That is to say, the
proportion of persons getting distressed is reduced through insurance
mechanisms. Thus, insurance enhances societal peace and security.
3. Insurance Accumulates Huge Funds for direct Investments in the Economy: Insurance companies are financial intermediaries, and by the nature of their operations they collect premiums from policyholders.
The premiums collected are always accumulated into what are called Insurance
Funds each maintained for a different class of insurance. Thus, there can be
Motor insurance Fund, Life Assurance Fund, Fire Insurance Fund, and Marine
Insurance fund. These are usually substantial sum of money.
By the nature of insurance business (a fiduciary business and complex transactions) government regulates and supervises the Insurance industry. Government specifies a minimum proportion of insurance funds to be invested in government requires these direct investments from insurers for the general good, of the nation as these government securities are meant to finance government projects.
Insurers do also lend to industries in form of long term
loans, direct equity-holding, industries debentures holdings, preference
shareholdings, and even mortgage loans on real estates. All these investments
in no small measure go towards the development of our national economy.
4. Insurance promotes industrial safety and general loss prevention measures: every loss of the life or property is a national waste. The value lost to the fire, lightning earthquake, destruction, war, civil commotion or other perils is a drain on the national wealth.
Attempts to
reduce or eliminate national waste refer to loss prevention or preservation
measures, and these include industrial safety measure, maintenance culture,
education of people on loss prevention techniques and other risk improvement
measures.
Insurers being the professional risk bearers underwrite risks to be insured. In other words, they assess the acceptability of the risk proposed for insurance and decide on the premiums to be charged.
In cases where the insurer
sends surveyors to inspect the proposed subject-matter of insurance, the
surveyors do identify defects likely to cause losses and advise the insured on
appropriate risk improvement measures. Different underwriting measures are
usually applied in respect to the physical and moral hazards presented by the
proposed risk for insurance.