insurance companies

In this article, B Shiva Ram Sharma pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Legal obligations of Insurance Companies towards its customers.


Insurance has a vast history going back to ancient times. It finds its relevance in the scripts written by Manu, Yagnavalkya, and Kautilya. The scripts envisage of pooling of capitals that could be rationalised in terms of calamities such as fire, floods, epidemics and famine and all sorts of uncertainties.

“Insurance in India have evolved over time taking inspiration from other countries like England.[1]The modern form of Life Insurance came to India from England in the year 1818 and from thereon it evolved. Oriental Life Insurance Company was the first life insurance company in India and branch office is located in Calcutta which was started by the Europeans.”

The insurance companies formed during that period were brought up with the idea of looking after the needs of the European community.


In the words of Justice Tindal, “Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”[2]

It is a contract represented by a policy in which an individual or legal entity receives financial assistance or reimbursement against losses or at the time of accident from an insurance company.

Insurance policies main objective is to escape against the risk of financial losses, either big or small, to the insured or property, or from liability for damage or injury caused to anyone.

In simple terms, Insurance is a financial risk in which the insured transfers or relieves himself of a risk of potential financial loss to the insurance company thereby paying insurance company a thing as premium, wherein the insured pays a monthly or yearly a certain amount to the insurance company to relive of the future loss if and when it occurs.


Insurance companies are a special type of financial institution that deals in the business of managing or mitigating or avoiding risk to Individual. Individuals and corporations often invest money and in return they promise to pay for the losses they incur if some unfortunate event occurs.

Insurance can be defined as safeguarding the interest of people from loss and uncertainty. It may at times described as a social device or social object to reduce or eliminate risk of loss to life and property.

Insurance in a way contributes and indirectly serves in increasing the economic growth of the society by provides stability by erasing the constant fear of loss or damage due to unforeseen circumstances.

The functions of insurance can be classified into two parts, they are

  1. Primary Functions
  2. Secondary Functions.


  1. The fundamental mission or aim of insurance is to allow safety against unforeseen future risk, accidents and uncertainty. Insurance cannot stop the risk from taking place but its function is for sure reduce the losses arising with the risk. Insurance is a safeguard against uncertain economic loss, by calculating the risk with others. Insurance is a tool to share the financial loss with that of insured. It is a medium through which losses are divided among larger number of people who have insured themselves. All the insured add the pay certain money called as premiums towards a fund and out of which the persons facing a specific risk is paid.
  2. Evaluating risk – Insurance calculates the risk involved by assessing diverse factors that give rise to risk hence, so therefore risk becomes the basis for ascertaining the premium rate asked by such insurance companies as well.
  3. Insurance Generates financial resources: Insurance accumulate funds by collecting premium from the insured. These funds on the other hand are invested in government securities and stock and other large scale projects. These funds are also further invested in industrial development of a country for generating more funds and utilised for the economic development of the country benefitting not only the insured but also country at large. Employment opportunities are increased or generated by big investments leading to capital formation in return.
  4. Promotes economic growth: Insurance makes a significant impact on the economy by distributing domestic savings. Insurance premium capital converts productive investments. Insurance provides for not only to mitigate loss brings but also bring in financial stability, promotes trade commerce activities which automatically results into economic growth and development.
  5. For development of economy investment are necessary and investments are made out of savings of people. Life Insurance Company is a way for mobilization of savings of people mostly from the middle and lower income groups but not restricted to whole of public at large at times. These savings are then invested for economic growth. The insurance act has strict provisions in the act to ensure that insurance funds are invested in safe areas for example like government bonds and companies.
  6. Contributes in the development of larger industries – Insurance provides an opportunity to develop those large industries which face more risks in their setting up. Entry of private players in the insurance business has added value to the business of insurance industry. The involvement of private players has turned the market very competitive and have given immense competition to the on time monopoly of the market LIC. This in turn has improved the service quality of the insurance.[3]
  7. Preventing or safeguard against losses – Insurance advices individuals, businessmen, institutions and corporate entities to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions by installation of automatic sparkler or alarm systems, etc.

One of insurance’s key roles is safeguarding the financial health of small and medium-sized enterprises.

  1. Investment of small capital – investment of small capital over a period of time leads to insuring oneself against bigger financial risk. So a monthly premium of small amount can insure oneself against losses to the tune of millions depending on the policies which one might opt for.
  2. Life insurance means savings: Insurance protect against risks and uncertainties also provides an investment channel too. Life insurance provides for savings in a systematic manner because of payment of regular premium to the insurance company.
  3. Medical support for sick person: A medical insurance quintessential in modern era due to highly expensive medical care which is generally beyond capacity of middle class society which exist in India. Anyone can be subject to illness or critical life threatening disease very unexpectedly and in the event of such serious illness medical insurance provides for financial security and plays major role in safeguarding against financial instability which one might face in event of hospitalization.
  4. Provides Information: Insurance plays an additional role in the economy by providing information to various institutions including government and individual against risks of various kinds which arise due to modernization and globalization, due to which various insurance have come up in the recent past and also there is surge information of insurance companies looking at the market and profits of these companies have been the guiding factor to come up with various policies which benefit the general public. These companies, in turn, do research as to in which area there lies an underlying risk and there being potential customers and in turn tries to leverage the maximum out of it and so, therefore, it can be said that insurance companies can be source of information.


Insurance companies main function is to provide for payment in happening or not happening of an uncertain event and this is called a contingent contract as per contract act. Better planning and administration can reduce the risk in a business but cannot eliminate it completely so that’s where the insurance companies role and functions fill the gap wherein they relieve the person from minimal financial losses which he or she might incur.

It is always uncertain has to when a person or company will facing the risk or whether or not that will risk occurring or not can also not be predicted by anyone and how much loss will be one facing is also a matter of speculation so it can be said that there is no definite time or amount of loss be predicted. So this is where the insurance company assures the insured that all the losses will be covered and payment will be given to him when he is paying premium as per the policy and role of the insurance company starts where the time when loss is incurred by the insured and thereon insurance company pays up for the losses depending on the facts and circumstances of each case.

So insurance companies role is also to improve the efficiency of a person indirectly wherein if a person is insured against losses which one might incur he or she will be able to perform without a worrying about the consequence of the act if done diligently and thereby he or she can devote his whole time to achieve his aim or objective in life and so insurance companies functions to benefit the public finances and also give security to the person insured and his family.

So therefore Insurance companies role and functions in today’s era is a important component in economy of a country and also Individual can benefit in all ways when he or she is insured against any risk of be it of property or body, the surge of insurance companies can be attributed to the fact of advancement of technology which by itself though beneficial but also exposes us to various risks in life so henceforth the role of the insurance companies is increasing rapidly.

[1] History of insurance in India, IRDA/GEN/06/2007,
MONALISA GHOSAL, ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT OF INDIA, ZENITH International Journal of Business Economics & Management Research Vol.2 Issue 7, July 2012, ISSN 2249 8826.[2]


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