Functions Of Insurance
Overview
Ask most people what insurance does and they will say it pays out when something goes wrong. True, but that is only the surface. Underneath sits a quiet machine that turns thousands of small, uncertain premiums into a fund large enough to rebuild a burnt shop, and then puts the waiting money to work building roads, factories and homes. Insurance both protects the individual and grows the whole economy, and the syllabus asks you to see both halves at once.
This lesson separates what insurance is built to do, its primary functions, from the wider benefits it happens to deliver, its secondary functions. You will see how the common pool works, why a single premium can stand in for a huge loss, how insurers become one of the largest investors in the country, and how the trade earns foreign exchange that counts among a nation's invisible earnings. By the end you will be able to place any function in the right family and back it with a Nigerian example.
Objectives
- State the primary function of insurance and explain how risk pooling achieves it
- Describe the secondary functions of insurance, including capital formation and loss prevention
- Explain how insurance supports international trade and the invisible earnings of a country
- Distinguish the primary from the secondary functions using practical examples
Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Functions Of Insurance. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which of the following is a PRIMARY function of insurance? A. Loss prevention B. Capital formation C. Risk transfer D. Provision of credit Answer: C
- The pooling of losses in insurance depends chiefly on the: A. Law of diminishing returns B. Law of large numbers C. Principle of subrogation D. Law of demand and supply Answer: B
- A mutual pool of 400 traders expects total annual fire losses of 4,800,000 naira, to be shared equally. What pure premium must each trader pay? A. 4,800 naira B. 12,000 naira C. 1,200 naira D. 48,000 naira Answer: B
- Which of the following is a SECONDARY function of insurance? A. Risk transfer B. Charging an equitable premium C. Creation of a common pool D. Loss prevention Answer: D
- Insurance adds to a country's invisible earnings mainly by: A. Paying claims to local policyholders B. Accepting risks from foreign clients and earning premiums abroad C. Collecting value added tax for the government D. Selling shares on the stock exchange Answer: B
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