Insurance Company: Definition, Roles & Functions

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Insurance Company Meaning

An insurance company is a financial institution whose primary function is to receive premiums and enter into contract with individuals and organizations (the insured) with the purpose of indemnifying (pay compensation to) the insured if they suffer certain losses in future.

Insurance Company: Definition, Roles & Functions
Insurance Company

What is an Insurance Company?

An insurance company may be defined as a financial institution involved in the protection of persons and objects against risks. These companies as financial institutions collect large sums of money called premium from individuals and organisations in order to insure lives and properties.

People save money with the insurance companies in form of life assurance which is paid to them after a period of time if they do not die before then under endowment assurance policy. On the other hand, under the whole life assurance, bulk of money is paid to the beneficiaries of the assured after his death.

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Functions or Roles of Insurance Companies

  • Pooling of risks: The insured pay premiums which are pooled into a fund. Compensation is paid to those who suffer losses from the fund.
  • Boosting expansion of commercial and industrial banks: Entrepreneurs are encouraged to expand their businesses being fully aware that they will receive compensation if they incur certain losses.
  • Direct investment: They sometimes invest in the productive sectors-industry, agriculture, commerce etc, with their large reserves of premiums.
  • Provision of capital to investors: They make long-term loans to entrepreneurs for investment in productive sectors.
  • Provision of investment advice: They provide to investors.