What is 'Assurance'
Assurance is a type of financial coverage that provides remuneration for an event that is certain to happen. Assurance is similar to insurance, with the two terms often used interchangeably, but insurance specifically protects policyholders from events that might happen and provides remuneration to them if and when those adverse events happen. Assurance may also refer to validation services provided by accountants and other professionals.
BREAKING DOWN 'Assurance'One of the best examples of assurance is whole life insurance as opposed to term life insurance. (In the United Kingdom, "life assurance" is another term for life insurance.) The adverse event that the two types of life insurance deal with is the death of the person the policy covers. Since the death of he covered person is certain, a life assurance policy (whole life insurance) results in payment to the beneficiary when the policyholder dies. A term life insurance policy, however, covers a set period of time, such as 30 years, from the time the policy was bought. If the policyholder dies during that time, the beneficiary receives money, but if the policyholder dies after the 30 years, no money is received. The assurance policy covers an event that will happen no matter what, while the insurance policy covers an event that might happen (the policyholder might die within the next 30 years).
Assurance as Professional Services
Assurance can also refer to professional services provided by accountants, lawyers and other professionals that assure the integrity and usability of documents and information produced by businesses and other organizations. Assurance in this context helps businesses and other institutions manage risk and evaluate potential pitfalls. Audits are one example of assurance provided by such firms for businesses to assure that information provided to shareholders is accurate and impartial.
Example of Assurance Services
Investors of a publicly traded company grow suspicious that the company is recognizing revenue too early, leading to positive financial results in recent quarters that will also lead to worse results in the future. Under pressure from shareholders, the management of the company in question agrees to hire an assurance firm to review its accounting procedures and systems and provide a report to shareholders. The report will provide assurance to shareholders and other investors that the company's financial statements are accurate and that its revenue recognition policies are in line with generally accepted accounting principles (GAAP). The assurance firm reviews the financial statements, interviews accounting and other department personnel, and speaks with customers and clients. The assurance firm finds that the company in question has followed GAAP and assures stakeholders that the company's results are sound.