FUNCTIONS OF INSURANCE

NAME : MBONYE ALLAN PROFESSION : LAWYER UNIT : LAW OF INSURANCE FUNCTIONS OF INSURANCE Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for money. In the case of Prudential Assurance Company ltd V Inland Revenue Commission [1904] 2 KB 658 at page 663 lord channel J states that a contract of insurance must be a contract for the payment of a sum of money or some corresponding benefit such as the rebuilding of a house, or the repairing of a ship, to be due on the happening of an event of which the event must have some amount of uncertainty about it and must be of a character more or less adverse to the interest of the person effecting the insurance. It must be a contract whereby for some consideration usually but not necessary for periodic payment called premium that you secure to yourself some benefit usually but not necessary the payment of a sum of money upon the happening of some event. A risk on the other hand is a situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not. A risk is not an uncertainty (where neither the probability nor the mode of occurrence is known), a peril A Peril is defined as the cause of loss or with hazard which is a condition that may increase the chance of loss. (cause of loss), or a hazard (something that makes the occurrence of a peril more likely or more severe). www.Businessdictionary.com 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. Every risk involves the loss of one or other kind. The function of insurance is to spread the loss over a large number of persons who are agreed to co-operate each other at the time of loss. The risk cannot be averted but loss occurring due to a certain risk can be distributed amongst the agreed persons. Anybody of them may suffer loss to a given risk, so, the rest of the persons who are agreed will share the loss. The larger the number of such persons the easier the process of distribution of loss, In fact; the loss is shared by them by payment of premium Is an amount paid periodically to the insurer by the insured for covering his risk which is calculated on the probability of loss. The functions of insurance can be studied into two parts (i) Primary Functions, and (ii) Secondary Functions as discussed below, Provide certainty Insurance companies and insurance provides certainty of payment at the uncertainty of loss. The uncertainty of loss can be reduced by better planning and administration. Uncertainty is the situation which involves imperfect and / or unknown information. https://en.wikipedia.org/ It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable and/or stochastic environments, as well as due to ignorance and/or indolence. Insurance relieves the person from such difficult task. Moreover, if the subject matters are not adequate, the self-provision may prove costlier. Thus Insurance removes all these uncertainty and the assured is given certainty of payment of loss. The insurer charges premium for providing the said certainty. In Wilson v Jones [1867] L.R 2 Ex 139 Lord Blackburn J stated that the uncertain event upon which the uncertain event depends is prima facie adverse to the insured’s interest and insurance is effected so as to meet the loss or detriment which may be suffered on the happening event. Providing protection While person keep on doing business and the high risk of uncertainty happening, it becomes necessary for the business men to seek protection and by so doing they undertake insurance. Insurance guarantees the payment of loss and thus protects the assured from sufferings. The insurance cannot check the happening of risk but can provide for losses at the happening of the risk. Let’s take an example of a person who wants to transport his cash to a named location, when there is insurance for the cash in transit they are sure that all is well in case of high way robbers or any such kind of calamities. Such protection assures business men that tomorrow there money is safe or at least will be recovered in case it’s stolen while on transit. Another scenario where there is protection let’s take a look at the person doing importation or exportation of goods when they have insurance they expect customer satisfaction at the end of the day in case the goods get lost or destroyed before they reach their final destination, thus its advantageous to have an insurance policy so as to secure all ones business transactions. Risk sharing This is also known as "risk distribution," risk sharing means that the premiums and losses of each member of a group of policyholders are allocated within the group based on a predetermined formula. A risk is a situation where the probability of a variable is known but when a mode of occurrence or the actual value of the variable is not. The risk-sharing in ancient time was done only at time of damage or death; but today, on the basis of probability of risk, the share is obtained from each and every insured in the shape of premium without which protection is not guaranteed by the insurer. Evaluating risk Leading insurers evaluate risk management by aligning the risk management model to the business model and focusing on aggregate exposures and product. This allows risk managers to understand their organization's accumulations across the business model and to mitigate those exposures as economically or efficiently as possible. Insurers that regularly evaluate, emphasize, and update their risk management capabilities will be better positioned to meet the expectations of policyholders, shareholders, and regulators, and to leverage their strengths competitively. Secondary functions: Besides the above primary functions, the insurance works for the following functions: Prevention of Loss: The insurance joins hands with those institutions which are engaged in preventing the losses of the society because the reduction in loss causes lesser payment to the assured and so more saving is possible which will assist in reducing the premium. Lesser premium invites more business and more business cause lesser share to the assured. So again premium is reduced to, which will stimulate more business and more protection to the masses. Therefore, the insurance assist financially to the health organization, fire brigade, educational institutions and other organizations which are engaged in preventing the losses of the masses from death or damage. It Provides Capital: Insurance companies provide capital to the society. The accumulated funds are invested in productive channel. The dearth of capital of the society is minimized to a greater extent with the help of investment of insurance. The industry, the business and the individual are benefited by the investment and loans of the insurers. Risk free trade Under the point of risk free trade, insurance companies awarded the assured with security that incase of any uncertain risk on his goods and products, health and fitness trade can still go one. For instance under life insurance the death of a director of a company does not mean the end of the company but simply a transition of powers and the money that would have been used in the funeral of the director can be channeled to boost the business thus ensuring a free and continuous trade. Still on the same since insurance companies protect the society from huge loses of damages, destruction and death this helps in economic progress of the insured. With this we see that an insured does not need to worry about damages or loses since all this is taken care of by the insurance company with all this all the assured has to do is improve on their efficiency by devoting all there time mind and soul to other things to boost a free trade economy. In a sum up of these point insurance companies boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover. “The Basic Functions of Insurance” by: Isha Bansal on Apr 05, 2011 In conclusion to this there are several function of the insurance company and thus cannot wholly be discussed but the major few discussed above are the common ones. The basic role of these insurance companies is to offer the assured protection and security of the uncertainty or risk that could happen to him or his business.  HAVE THESE FUCTIONS BEEN WORKED OUT TODAY With the current financial situation in Uganda one cannot say that the functions of the insurance company have been full worked out. Below is a discussion on the same In the first place the lever of sensitization of the masses is low and thus even with the existence of the insurance companies and their policies it’s not easy to say that the functions that create them have been upheld since the people are not aware of the same. An increase in the level of awareness of the masses of the need to take up insurance policies and there advances one can say that these functions can be fulfilled. For example until recently women used no to take medical insurance while they were pregnant because they saw no need to do that not until when the high mother and child mortality rates increased at it was uncertain of a mother will be safe after or during delivery or the baby, thus in major hospitals its highly recommended that all expecting mothers taken on insurance of the same to cab the problem. With an increase in the sensitization we expect to see these functions working in full force, For instance the aspect of provision of protection in the business sector especially those person taking on export and import or even transportation has been executed, recently Uganda Revenue Authority released an article on the importance of a CIF contract especially when it comes to export and import since many traders where facing a challenge on receiving defective goods, goods getting lost or damaged and in the long run the trader makes huge loses now with the CIF which caters for insurance the traders goods when lost or damaged they are compensated by the insurance company and thus the traders are protected from all the uncertain risk. Looking at the aspect of uncertainty, we leave in a community where anything can happen at any time and hour for instance if we look at the case of Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 it was stated that the contract could not be frustrated since the person could find an alternative mean to deliver the goods to the client. Lord Channel J in Prudential assurance co. v Revenue commissioner stated in his judgment that the next thing that is necessary is that the event should be one which involves some amount of uncertainty. There must be some uncertainty whether the event will happen or not for there to exist insurance. So with such majority of those who have taken up insurance anticipate that there is an event that could happen and end up frustrating there contract or case them not to perform the contract but with the existence of insurance companies persons are able to seat back and wait to see if the event happens or not without worrying of making any loses. Thus insurance companies one can say that they have executed there role or function in the society. On the other hand on the same aspect of uncertainty, insurance companies have failed to execute this basing on the ground that they have failed to educate and teach the soon to be assured of the significance of insurance in this there is no need for persons to anticipate for the future and therefore many people end up suffering loses that could have been solved with insurance. Thus although insurance companies main objective is to get risk the limited information and sensitization on the matter has hindered the execution of this function. When it comes down to a risk free trade in Uganda this function of the insurance companies has been greatly executed for instance before traders had to worry about highway robbers sea pirated and also damage of goods that lead to great loses in their businesses but with the emergency of several insurance companies traders in Uganda can enjoy a risk free transaction amongst each other. For instance a person transporting cash from Kampala to Mukono in a car will not need to worry that he might meet thieves in between his journey who will take his money and in turn push him back in business since they can simply acquire a policy that caters for this and in the long run when such a calamity happens the insurance company pays them back and business goes ahead. With this business men in and around Uganda can enjoy an risk free trade and thus development of economies and hence insurance companies have duly executed thus function. On the other hand however because of fraud and mischief many people have used fraud to cheat these insurance companies and thus when they make the payment back to the assured, it’s as if they make profits out of these insurance firms since they plot these robberies and lose of goods so that they can claim form the assured of the insurable interest. This in return sets back these insurance companies and thus end up closing or reducing on the policies they have and thus limited service to the community and in return they cannot protect the traders that would have loved to insure their goods genuinely. This hinders trade and development. the insurance market in Uganda as even other East African partner states face the same challenge of luck of awareness and in turn has also caused low public trust among those who are aware has limited the extent to which insurance can be accepted as a reliable risk management mechanism. Moving forward, the Authority and the stakeholders have developed public awareness creation strategies in an effort to increase insurance uptake and the penetration levels. So in respect to insurance neglect there is a chance to protect and promote it by increasing public awareness. Risk Based Supervision involves risk based underwriting, risk based capital and is a paradigm shift where insurers move from traditional compliance based to risk based focus. This move will help insurers identify individual company risks, assess systems and suggest ways of controlling such risks. One of the pre-conditions for successful implementation of RBS is the state of the law. In a conclusion the most important functions of insurance companies are to provision of protection and certainty of clients insured interest these insurance companies still have challenges in the execution of these functions. The Uganda Insurance commission was set up to handle some of these challenges and it has tried its best and what left is the biggest job of sensitization of the masses about the relevancy of having and taking on an insurance policy. References