Economic essence and functions of insurance.
Insurance is a complex of economic relations associated with forming the insurance fund at the expense of the insurers with the purpose of covering the loses caused by some unfavourable events, stipulated in the contract.
Characteristic features of insurance:
- Premiums are paid by policyholders up to the definite rates and the funds are formed for the account of premiums.
- The funds are accumulated in special organisations – insurance companies.
- The funds are only distributed to the fund investors.
- The funds are used only for particular purposes.
- The funds are used according to the rates, stipulated beforehand, that is, when joining the insurance relations the insurer knows what compensation he might get for an incident.
- The funds are distributed only within stated periods of time.
- Insurance is necessary only when somebody is interested in it, i.e., when some unforeseen circumstances can really occur.
- The events must have features of probability or fortuity, when the occurrence of the event is not obvious or doesn’t depend on the will of the insurer.
- Insurance is based on mutual and solidary distribution of losses among all participants of insurance.
Functions of insurance:
- The core of risk and redistributing function is that the insurance funds are redistributed among the participants due to concluding the insurance agreement and consequence of insurance events.
- The core of preventive function is that insurance companies carry out financing of unfavourable events. For this the insurance company forms a set of preventive actions for the account of allocations.
- The core of saving function is that a sum of money is saved by means of life insurance and is connected with the defence of the achieved income.
- The core of controlling function is that the insurance companies control the activities of their clients concerning their observing of safety measures.
Classification of insurance.
A classification of insurance is the distribution of insurance services according to the groups defined by some common signs. There exist classifications based on forms and on branches of insurance.
Classification based on forms of insurance.
Insurance is carried out in two forms: obligatory and voluntary.
Obligatory forms are defined by the following principles:
The obligatory insurance is defined by the law, according to which the underwriter must insure the corresponding objects, and the insurer must take necessary insurance payments. The law usually stipulates all necessary terms and the order of carrying out the given kind of insurance.
For the overall obligatory insurance indicated by the law, the insurance agencies carry out annual registration of the insured objects, make payments and charge premiums in the stipulated terms.
Automatic insurance covering of the objects is indicated by the law. The insurer mustn’t announce the appearance of the insured objects to the insurance company. The given property is automatically included in the field of insurance. It will be automatically registered and the insurer will be charged to pay the fee.
The effect of the obligatory insurance does not depend on the premiums. In cases when the insurer didn’t pay the insurance premiums, they are charged by the order of the court. In case of loss of or damage to the insured property not covered by insurance premiums the insurance compensation is due to payment out of the insurance debts. The undue premiums are imposed with a fine.
Permanent obligatory insurance. It works during the whole period, within which the insurer uses the insured property. Only unpractical and dilapidated property doesn’t fall under insurance coverage. The effect of the insurance doesn’t stop when the property is passed on from one insurer to another. It loses its effects only in case of loss of the property. In case of personal insurance an overall automation comes into effect. But it has a strictly stipulated period of time and is completely dependent on insurance premiums (for example, obligatory insurance of passengers).
Kinds of obligatory insurance in Moldova:
- insurance of passengers against accidents ;
- insurance of military men;
- obligatory medical insurance;
- car owners’ responsibility insurance;
- carriers’ responsibility insurance.
Voluntary insurance is based on observing the following principles:
Voluntary insurance is effective under the law about insurance and under voluntary authority. The law defines the objects that fall under insurance and stipulates the general conditions of insurance. The specific terms are regulated by the insurance rules.
Voluntary participation in insurance is characteristic only for the insurers. The underwriter is not authorised to refuse to insure the object if the wishes of the insurer do not contradict the conditions of insurance. The given principle guarantees concluding the contract on the demand of the insurer.
Selective voluntary insurance is due to the fact that not all insurers wish to participate in it. Besides, there exist some restrictions for making contracts.
Voluntary insurance always has some time limits. For this end, the beginning and the end of the period of insurance are specially stipulated in the contract. Voluntary insurance may become permanent only by making the second contract for a new period.
Voluntary insurance is effective only after paying the insurance premium. The contract comes into effect after paying a single or the first insurance premium. Non-payment of the next premium of long-term insurance brings to the cessation of the contract.
The voluntary insurance coverage depends on the wishes of the insurer. Under the property insurance the insurer may define the size of the insurance sum within the limits of the property evaluation. Under the personal insurance the insurance sum is defined by the contract of the parties.
Classification according to the branches.
Insurance is carried out in the next branches:
- property insurance;
- personal insurance;
- responsibility insurance in the face of the third person;
- insurance of economic risks.
Property insurance is the branch of insurance, where the object of insurance is the property that can be damaged. Depending on the forms of property and the categories of insurance there exists: the property of juridical persons, physical persons and agricultural enterprises.
Personal insurance is the branch of insurance in which the objects of insurance are life, health and ability of a person to work. There are life insurance, insurance against accident and medical insurance.
Liability insurance is the branch of insurance the object of which is the responsibility in the face of the third person, which may suffer from the actions of the insurer. There are insurance of responsibility of car owners, insurance of professional responsibility, etc.
Insurance of economic risks is the branch of insurance, the objects of which are the results of entrepreneur’s activity. There may be defined the insurance of the risks against direct and indirect losses.
Types of insurance funds.
Insurance funds are a fair necessity, they perform the functions of safe keeping and continuity of production of material goods for people.
Functions of insurance funds:
- Preventing the insurance cases.
- Suppression and liquidation of the event covering losses.
Depending on the degree there are three means of forming the insurance funds:
- decentralised (self-insurance);
Under centralised form the insurance fund is formed by the state. Its core is that the state allocates a certain portion of its resources and keeps it for extraordinary cases of destructive consequences. This fund may be created both in material and monetary forms.
Negative moment: sufficient material and financial resources are drawn from inventory reserves. It is impossible to provide big reserves.
Positive moment: it doesn’t depend on wishes and potentials of final users of funds. It is concentrated in one owner’s hands and prevents its using for other purposes.
Under self-insurance a reserve fund is formed by any juridical or physical person. Self-insurance may be carried out both in material and monetary forms.
Negative moment: the volume of possible losses is unknown, neither is the needed size of the fund.
Positive moment: a quick method of using, as it is at the disposal of the owner.
Insurance as a means of forming an insurance fund assumes:
- Merging of different producers, when they are not able to cover the losses for their own account. Then the redistribution of losses from one suffered to other insurers takes place.
- Existence of the majority interested in forming the insurance fund, existence of insurance companies dealing with the redistribution of resources and possible losses. The fund is used only to cover the losses of certain participants of the fund, stipulated beforehand.