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Introduction

The insurance industry plays an important role in our society. Recent studies indicate that the majority of American households owned some form of life and/or health insurance. The following basic principles will be studied in greater detail later.

Basic Insurance Principles

• Risk Pooling - By gathering the various individuals in their numerous occupations and pastimes into a common group risk averages can be projected.

• The Law of Large Numbers - the larger the number of the group in a pool the more accurate to projection of losses.

The Concept of Risk

Risk is defined as the uncertainty regarding loss and are of two types:

• Speculated Risks = the chance of risk or gain

• Pure Risks = only the chance of loss (these are insurable)

• Perils are called on by hazards (which are of 3 types)
  • Physical hazards
  • Moral hazards = lack of self-control usually addictions
  • Morale hazards = reckless hobbies or occupations

Treatment of Risk

• Avoidance
• Reduction
• Retention
• Transference to insurance

Elements of an Insurable Risk (Loss)

• Due to chance
• Definite and measurable
• Predictable
• Not catastrophic
• Must be part of a large pool
• Exposures must be randomly selected to avoid concentration of high risks

The economic basis of insurance is human life value Insurance is the practical solution to the economic losses associated with death sickness and accidents

The following question is a review of this page. Answer it and then click below to check you response.

An established economic reality exists in the knowledge that the risks of life can be compensated by a system that uses p____ and the Law of Large Numbers that transfers the risk from the individual to a third-party.