Business Services


There are no certainties or guarantees in life. There is no guarantee that the business will not suffer an unexpected loss or damages. So while we cannot protect our interests against all risks, we can opt for some insurance. Let us take a look at concepts of insurance and functions of an insurance company.

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Insurance is defined as a contract, which is called a policy, in which an individual or organisation receives financial protection and reimbursement of damages from the insurer or the insurance company. At a very basic level, it is some form of protection from any possible financial losses.

The basic principle of insurance is that an entity will choose to spend small periodic amounts of money against a possibility of a huge unexpected loss. Basically, all the policyholder pool their risks together. Any loss that they suffer will be paid out of their premiums which they pay.

Insurance: Concept, Principles, Functions of a Insurance Company

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Functions of an Insurance Company

1] Provides Reliability

The main function of insurance is that eliminates the uncertainty of an unexpected and sudden financial loss. This is one of the biggest worries of a business. Instead of this uncertainty, it provides the certainty of regular payment i.e. the premium to be paid.

2] Protection

Insurance does not reduce the risk of loss or damage that a company may suffer. But it provides a protection against such loss that a company may suffer. So at least the organisation does not suffer financial losses that debilitate their daily functioning.

3] Pooling of Risk

In insurance, all the policyholders pool their risks together. They all pay their premiums and if one of them suffers financial losses, then the payout comes from this fund. So the risk is shared between all of them.

4] Legal Requirements

In a lot of cases getting some form of insurance is actually required by the law of the land. Like for example when goods are in freight, or when you open a public space getting fire insurance may be a mandatory requirement. So an insurance company will help us fulfil these requirements.

5] Capital Formation

The pooled premiums of the policyholders help create a capital for the insurance company. This capital can then be invested in productive purposes that generate income for the company.

Principles of Insurance

As we discussed before, insurance is actually a form of contract. Hence there are certain principles that are important to ensure the validity of the contract. Both parties must abide by these principles.

1] Utmost Good Faith

A contract of insurance must be made based on utmost good faith ( a contract of uberrimateĀ fidei). It is important that the insured disclose all relevant facts to the insurance company. Any facts that would increase his premium amount, or would cause any prudent insurer to reconsider the policy must be disclosed.

If it is later discovered that some such fact was hidden by the insured, the insurer will be within his rights to void the insurance policy.

2] Insurable Interest

This means that the insurer must have some pecuniary interest in the subject matter of the insurance. This means that the insurer need not necessarily be the owner of the insured property but he must have some vested interest in it. If the property is damaged the insurer must suffer from some financial losses.

3] Indemnity

Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the responsibility of compensating the insured against any possible damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity.

4] Subrogation

This principle says that once the compensation has been paid, the right of ownership of the property will shift from the insured to the insurer. So the insured will not be able to make a profit from the damaged property or sell it.

5] Contribution

This principle applies if there are more than one insurers. In such a case, the insurer can ask the other insurers to contribute their share of the compensation. If the insured claims full insurance from one insurer he losses his right to claim any amount from the other insurers.

6] Proximate Cause

This principle states that the property is insured only against the incidents that are mentioned in the policy. In case the loss is due to more than one such peril, the one that is most effective in causing the damage is the cause to be considered.

Solved Question for You

Q: Write a few lines on the Indian Insurance Sector.

Ans: India’s economy has been in a boom for the last two decades. There has been increased manufacturing and financial activities. This, in turn, has triggered a rapid growth in the insurance sector as well.

In the year 2000, the authorities allowed private companies to be a part of the insurance business. Today there are 13 companies in life insurance and 13 in general insurance. The most prominent one is of course LIC. And then there are other major players like New India, Tata AIG, Bajaj Allianz, ICICI Lombard etc.

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2 responses to “Nature and Types of Services”

  1. Anthony Obiri Yeboah says:

    which author according to this website explain the nature of services and types of services?

  2. David says:

    A great guide for business services. Thanks for sharing.

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