Functions and Principles of Insurance

Let us begin with Functions of Insurance

Nita is a SheCab driver in Mumbai. She offers taxi services to women from 5 pm to 2 am every day.

Since she is always on the road, there is a possibility of accidents or getting her cab damaged.

Similarly, people are exposed to various types of risks while carrying out different activities in their daily lives.

This risk is caused due to unexpected events that may cause loss of money or damage to property.

The first function of insurance is risk sharing. Let us understand what that means.

To lower the rate of risk, people take up insurance policies that protect them against unexpected loss.

Nita can share her risk with the insurance company by taking either life insurance or vehicle insurance.

This will allow her to avail a compensation in case of any damage or loss to her vehicle or life.

Let us Understand How Insurance Works

The person whose loss is protected is known as the "insured" and the insurance company that is providing the protection will be known as the "insurer".

In our story, Nita will be the 'insured' and the insurance company will be known as the 'insurer'.

The written agreement between Nita and the Insurance Company will be legally known as a "contract/agreement".

The insurance can also be called a 'policy'.

The fundamental principle of insurance is to protect the insured against any possible loss.

Nita will have to pay an amount of money to the insurer as a premium. In exchange for this, Nita will receive protection against any possible loss.

An insurance policy provides a guarantee of compensation to the insured person.

The insurance company can also invest the premium amount received from the insured person in various income generation schemes.

Now, let us understand the Principles of Insurance

Good faith; Both the insurer and the insured should display good faith towards each other.

Nita should disclose all facts relating to the risk being insured.

The insurance company should clearly communicate all the terms and conditions in the insurance contract.

Insurable interest; The insured must have an interest in saving the value of the thing or life that is insured.

Anything that needs to be compensated, must have some monetary value.

Indemnity: The insurance contract makes the insurer responsible to compensate the insured for any loss caused to him/her.

Proximate cause: The insurance policy only covers the loss caused by the causes stated in the policy. The direct and most probable cause of loss will be considered.

Subrogation: After being compensated, the ownership rights are handed over to the insurer.

This is to make sure that the insured does not make a profit by claiming compensation again on the same damage.

Contribution: Only an insurer who has paid the premium can claim compensation on the insured thing/ life when any damage is caused.

Mitigation: This principle states that it is the duty of the insured to take reasonable steps to minimise the loss or damage to the insured property.


The principles of insurance are; good faith, having an insurable interest, providing indemnity, having a proximate cause, right of subrogation, contribution and mitigation.

Functions of insurance are; providing certainty, providing protection, risk sharing and assisting in capital formation.

The End.