Question

Explain the THREE (3) important roles of Insurance companies in the financial system.

requirements

Min 230 Words

0% plagiarism rule applies

Answer 1

Insurance companies are a part of financial system and considered as a safeguard the interest of people from loss and uncertainty.

It is actually a social device to reduce or eliminate risk of loss to life and property.

3 major role played by insurance companies:

1. Provide safety and security- It provides financial support and minimise uncertainties in business and human life.

It provides cover against any sudden loss. Like; in case of death , loss due to fire, marine , accidents etc.

2. Generates financial resources- Insurance generates funds by collecting premium. These funds are invested in government securities and stocks. So somehow, it is helpful to generate income and contributing in economic development of the country.

On the other hand, it generates employment opportunities too by big Investments leading to capital formation.

Insurance generates significant impact on the economy by mobilizing domestic savings. It turns accumulated capital into large scale productive Investments .

In addition, Company mitigates losses, provides financial stability and promotes trade and commerce.

No doubt, these steps are helpful to economic development and growth. Insurance companies play crucial role in growth of an economy.

3. Spreading of risk- Insurance facilitates spreading of risk from the insured to the insurer.

The basic principle of functioning of insurance companies is to spread risk among a large number of people. This attracts a large number of people get insurance policies and saving attitude for paying premium.

Whenever a loss occurs it is compensated out of funds of the insurer.