Chapter 4 : Insurance
What is ‘Insurance’?
Insurance is a legal agreement between two parties – the insurer and the insured, also known as insurance coverage
or insurance policy. The insurer provides financial coverage for the losses of the insured that s/he may bear under
certain circumstances
Individual Benefits …
1. The obvious and most important benefit of insurance is the payment of losses. An insurance policy is a
contract used to indemnify individuals and organizations for covered losses.
2. The second benefit of insurance is managing cash flow uncertainty. Insurance provides payment for covered
losses when they occur. Therefore, the uncertainty of paying for losses out-of-pocket is reduced significantly.
3. A third and uncommon benefit of insurance is complying with legal requirements. Insurance meets statutory
and contractual requirements as well as provides evidence of financial resources.
4. Another very important benefit of insurance is promoting risk control activity. Insurance policies provide
incentives to implement a loss control program because of policy requirements and premium savings
incentives.
5. The fifth benefit of insurance is the efficient use of an insured's resources. Insurance makes it unnecessary to
set aside a large amount of money to pay for the financial consequences of the risk exposures that can be
insured. This allows that money to be used more efficiently.
6. Another important benefit of insurance is support for the insured's credit. Insurance facilitates loans to
individuals and organizations by guaranteeing that the lender will be paid if the collateral for the loan is
destroyed or damaged by an insured event. This reduces the lender's uncertainty of default by the party
borrowing funds.
Social Benefits…
1. Protects society’s wealth :
Life Insurance offers protection against loss of human wealth. General insurance policies protect the property against
losses due to fire, theft, accident, earthquake, etc. As such, both general and life insurances offer protection to
stabilize business condition and financial position.
2. Maintains standard of living
Insurance rescues many people in the society who are rendered destitute through misfortune. They are able to
maintain the standard of living due to high returns. They reduce the destitution and misery.
3. Social security benefits
Insurance plays a pivotal role in fulfilling certain needs for which state might have to provide. The provision for old
age, sickness and disability of persons in general. Those who have their insurance do not become a burden on state
insurance plan.
4. Equitable distribution of loss
Insurance distributes the cost of accidental events in a equitable manner. In the absence of insurance, this would
have been paid in a haphazard manner
Economic Benefits…
1. Insurance companies assist businesses in reducing risk and protecting their employees
2. Insurance companies provide financial security to customers
3. Insurance companies help in the funding of economic development projects
4. Insurance companies help in the funding of economic development projects
5. Insurance has a favourable impact on the tax and financial system's stability
6. Insurance provides employment
7. Insurance contributes to an increase in GDP
Difference between Banking and Insurance…
1. Nature of Services:
• Banking: Banks primarily offer financial services related to the management of money, such as accepting
deposits, providing loans, and facilitating transactions.
• Insurance: Insurance companies provide risk management services by offering coverage against potential
losses or damages in exchange for regular premium payments.
2. Function:
• Banking: Banks act as intermediaries between individuals, businesses, and the financial system, providing
services such as savings accounts, checking accounts, mortgages, and investment products.
• Insurance: Insurance companies assess risks and provide policies that protect individuals or businesses from
potential financial losses due to events like accidents, theft, or natural disasters.
3. Primary Objective:
• Banking: The primary goal of banks is to provide a secure and convenient platform for financial transactions,
facilitate savings, and offer credit facilities to promote economic growth.
• Insurance: Insurance companies aim to minimize the financial impact of unforeseen events on individuals or
businesses by providing compensation or reimbursement for covered losses.
4. Risk vs. Savings:
• Banking: Banks focus on managing and allocating funds while minimizing risks. They offer interest on savings
and investment products to help customers grow their wealth.
• Insurance: Insurance companies focus on mitigating risks and providing coverage against potential losses.
Policyholders pay premiums to transfer the risk of significant financial loss to the insurer
5. Products and Services:
• Banking: Banks offer a wide range of products and services, including savings accounts, checking accounts,
credit cards, loans, mortgages, investment accounts, and financial planning services.
• Insurance: Insurance companies offer various types of policies to cover different risks, such as life insurance,
health insurance, auto insurance, property insurance, and liability insurance.
6. Regulation:
• Banking: Banks are highly regulated by government authorities, such as central banks, to ensure stability,
transparency, and compliance with financial regulations.
• Insurance: Insurance companies are also regulated by government bodies to protect policyholders' interests,
maintain solvency, and ensure fair practices.
Conclusion
To better understand the difference between banking and insurance, consider the following examples:
• Example 1: When you deposit money into a bank account, you are utilizing a banking service. The bank
safeguards your funds, allows you to withdraw or transfer money, and may offer interest on your savings.
• Example 2: If you purchase car insurance from an insurance company, you are obtaining coverage for
potential damages or losses resulting from accidents. In exchange for paying premiums, the insurer agrees to
compensate you for covered claims.
In summary, while banking primarily focuses on financial services, managing money, and providing credit, insurance
is centered around risk management and offering protection against potential losses. Both sectors play crucial roles in
the overall financial ecosystem, catering to different needs and objectives.
