Insurance removes or limits the burden of certain types of random events.
Those events may be negative: damage to one’s health or destruction of property. They might also be positive - the birth of a child – however, at the same time lead to increased financial needs.
For a single person, the financial costs of such events may be very painful. Thanks to the insurance company, which collects premiums from many people, but pays compensations only to those who suffered damage, the costs are spread out.
The insurance company agrees to provide specific benefits, in case of a given random event, and the policyholder (the other party to the contract) agrees to pay the premiums. Insured is the person, whose property, life or health is the subject of the insurance. When it comes to insurance, the notion of a beneficiary plays an important role. It is the person that has been designated by the insured to collect the insurance benefits after his death.
What are the functions of insurance?
Insurance fulfill three primary functions:
The protective function is related to providing the insured with protection in case of the occurrence of certain events. The protection usually has a financial dimension, because the benefits paid by the insurance company are supposed to meet the suddenly increased needs or compensate unexpected damages. In practice, insurance services also provide solutions to problems in an organizational manner, such as an overnight accommodation or a replacement car. This means that even before the occurrence of the insured event, the insured has a sense of security, because for a low price in comparison to possible losses, he discards the need to prepare financially and psychologically for the consequences of what might happen.
The second of the insurance functions is preventive, which means preventing the random events from occurring. Preventing damage is one of the obligations of the policyholder – its negligence or intentionally causing damage constitutes the basis for the refusal to pay the benefits. An example would be the loss of discounts on mandatory civil liability insurance of the car, after the occurrence, due to the insured's fault, of the need to pay compensation to a victim.
The last function of insurance is the financial function. There are many positive effects of risk financing through insurance. These are: eliminating worries related to experiencing loss experience or the occurrence of sudden, increased financial needs; financial security for loved ones in the event of the insured's death; certainty and financial stability; increased financial credibility, or the release of funds that would otherwise be used to cover the damages.
The conclusion of certain types of life insurance policies allows you to collect savings using investment funds. The funds accumulated in this way can be used to secure income in the old age, for a mortgage or for the future offspring.
Classification of insurance and insurance products
An insurance product is a package of services provided to an insured person by an insurance company for a specific fee, from the moment the insurance contract is concluded up to its termination. These products can be divided according to several criteria. The main division is compulsory and voluntary insurance. Compulsory insurance are those that are required by law. They may be further categorized into: compulsory general insurance, such as third-party liability insurance for motor vehicle owners, farmers or tax advisors, as well as compulsory special third-party liability insurance, for example statutory auditors or court bailiffs.
The second criterion for classifying insurance products is the number of insured objects - hence the division into further types of insurance: individual and collective. Collective insurance allows for a greater number of people or institutions to be covered by the protection. This allows negotiating a lower premium and simplifying formalities related to the concluding of separate insurance contracts.
Collective insurance also distinguishes group insurance, in which the system of personal risk assessment, the level of premiums and benefits for a certain group of insured persons, e.g. employees from one workplace, are standardized.
The third criterion for the division of insurance is the subject of insurance and because of it, personal and property insurance are distinguished.