Here Are Some Of The Functions And Purposes Of Insurance

 As described in our article Insurance is. In simple terms, it can be concluded that insurance is an agreement that occurs between the customer and the insurance company. The contents of the insurance agreement are that the insurance company is willing to provide a sum of money to compensate for losses due to a risk that occurs in the future after the customer makes a payment of a certain amount of money (premium) as stated in the contents of the mutually agreed insurance agreement.

What is the main function of insurance?

The following are the main functions of insurance:

Risk Transfer

This risk transfer means that the risk will be transferred to the insurance company as the insurer. So that the amount of uncertainty suffered by the customer due to an unexpected event will be replaced by the insurance in the form of compensation or claim compensation because the customer has paid the premium. In this case, insurance companies make a vital contribution to the economy; namely by minimizing the possibility of a risk occurring or the possibility of decreasing the level of loss.

An entrepreneur will avoid feeling anxious about the possibility of risk so that he can focus more on the efficiency of his business activities. Whereby paying a relatively smaller premium, he can take advantage of the capital funds that were originally allocated for lost funds. Thus he can expand his business activities and even if the risk occurs, his business continuity is more guaranteed.

Equitable Distribution Of Loss

The insurance company will arrange for premium payments to be "balanced" with the risk that will be borne by the insurer. This is because the insurance company has a team of actuaries who conduct an assessment (evaluation) of the risks to be taken over. Thus both parties will not feel disadvantaged by the existence of the agreement. For other than life insurance, the premium amount will be determined based on the premium rate multiplied by the desired coverage value. For life insurance, the amount of the premium is usually by the agreement or stipulation of the insurance company.

Fundraising

Funds sourced from customers are collected and managed in such a way by an insurance company or by a designated fund/investment management company. The proceeds from the management of the customer's funds are used to pay compensation claims if the customer experiences a risk as stated in the insurance agreement that has been agreed upon. Investment activities carried out by insurance companies certainly provide positive benefits for the economy. Customer funds invested in various sectors can help boost productivity.

Then what is the purpose of insurance?

The purposes of insurance are as follows:

Protection guarantee

Insurance aims to provide a guarantee of loss protection from the risks that may be suffered by the customer. Like safety equipment used by workers that can reduce the risk in the event of a work accident.

Increase efficiency

With insurance, customers can minimize energy, time, and costs for the protection of themselves and their assets. It is enough to only pay premiums, the amount of which is certain and fixed in each period. So there is no need to replace or pay for the losses incurred which are large and uncertain.

Credit Eligibility

Currently, insurance has become the basis for providing credit by banks or other lending institutions. In granting credit or leasing, the creditor or leasing party requires a guarantee of protection for the collateral offered by the debtor.