Economically Feasible Cost

To be insurable, the chance of loss must be small. The cost of an insurance policy consists of the pure premium, or amount actually needed to make loss payments, and the expense portion. If the chance of loss approaches 100%, the cost of the policy will exceed the amount that the insurance company is obligated to pay under the contract.

For example, it would be possible for a life insurance company to issue a $1,000 policy on a man 99 years of age. The net premium alone, however, would be about $980, to which would have to be added an amount for expenses which would bring the premium total to more than the amount of insurance. To make life insurance rates attractive, the premium has to be far less than the face of the policy.

Chance of Loss Must Be Calculable

Some probabilities of loss can be determined by logic alone-for example, the probabilities involved in the flip of a coin. Others must be determined empirically, that is, by a tabulation of past experience with a projection of that experience into the future.

All types of insurance probabilities are determined on an empirical basis. There are some chances of loss, however, which cannot be determined either by logic or from past experience. Unemployment is an example. Unemployment occurs with such a degree of irregularity that, as yet, no one has succeeded in working out a method of determining its future incidence.

This is one reason why unemployment insurance is not sold by private insurance carriers. If there are no available statistics on chance of loss, it is impossible to predict losses, in spite of a large number of exposures.

Unlikely to Produce Loss to Majority Simultaneously

No insurance company can afford to insure a type of loss which is likely to happen to any great percentage of those exposed to it. True, life insurance companies insure their policyholders against death even though it is well established that every one of them will die eventually.

The life insurance company is really insuring its policyholders against premature death. Its rates and reserve accumulations are fixed in such a way that it can pay claims as the claims mature without causing financial hardship to the company.

If all the policyholders of a life insurance company should die prematurely, this company would be just as bankrupt as would a fire insurance company whose policyholders all lost their houses by fire.

Unemployment runs aground on this last barrier, too. Those individuals whose jobs were secure could never be sold unemployment insurance. Prospective customers would be drawn solely from those who felt their employment situations to be insecure.

When a business recession occurred, hosts of the insureds would lose their jobs at the same time. It would be equivalent to a life insurance company having a large percentage of its insureds die at the same time.

Insurance is an arrangement whereby the unfortunate few who lose are indemnified by the fortunate many who escape loss. Particularly those whose financial well being depends on it, which is often the case with the families of term life insurance policyholders. If the many, however, suffer the loss, then the few will prove inadequate to indemnify them properly, except at an uneconomic premium.

In order to guard against catastrophic losses, fire insurance companies, for example, seek a wide distribution of exposures and set up underwriting standards which prohibit the concentrations of business in small sections of a city. They also put a clause in their policies excluding losses due to wars, thus relieving them of the danger of catastrophic losses resulting from atomic warfare.

By: Sarah Martin

All lenders insist on Buildings Insurance if any property is secured against a loan. If anything adverse happens to the property (like it being burnt down), the same property can be rebuilt from the proceeds of the insurance claim. And if your property is mortgage free and a similar devastation occurs to it, you will still be protected by the insurance policy and will be able to rebuild your property from the proceeds of your claim.

All Buildings Insurances are taken out so as to have a peace of mind against misfortunes that you hope will never occur. This kind of insurance offers protection against structural damages e.g. roofs, walls, floors, ceilings, windows and doors. The causes of structural damages specified in policies are usually by fire, detonation, burglary or attempted burglary, malicious damage /vandalism, natural calamities like lightning, flooding, storms, earthquakes, subsidence and falling trees etc. Also included in the policies are damages on outdoor properties such as gates, fences and railings.

But do be aware that not all policies cover all the above mentioned potential damages and each insurer will have its own exclusion peculiar to that particular policy. Should you require any specific cover which has not been detailed in the policy then you can obtain one by paying an additional premium.

In the unfortunate event of you not being able to reside in your property until it has been deemed safe and secure for you to live in, you will need to ensure that your Buildings Insurance policy covers you for a suitable alternative accommodation while works are being carried out on your property. Also make sure that your policy covers you for any associated architects’ or surveyor’s fees.

By: Syed Abedin

The real nature of insurance is often confused. The word “insurance” is sometimes applied to a fund that is accumulated to meet uncertain losses. For example, a specialty shop dealing in seasonal goods must add to its price early in the season to build up a fund to cover the possibility of loss at the end of the season when the price must be reduced to clear the market. Similarly, life insurance quotes take into consideration the price the policy would cost after collecting premiums from other policyholders.

This method of meeting a risk is not insurance. It takes more than the mere accumulation of funds to meet uncertain losses to constitute insurance. A transfer of risk is sometimes spoken of as insurance. A store that sells television sets promises to service the set for one year free of charge and to replace the picture tube should the glories of television prove too much for its delicate wiring. The salesman may refer to this agreement as an “insurance policy.” It is true that it does represent a transfer of risk, but it is not insurance.

An adequate definition of insurance must include both the building-up of a fund or the transference of risk and a combination of a large number of separate, independent exposures to loss. Only then is there true insurance. Insurance may be defined as a social device for reducing risk by combining a sufficient number of exposure units to make the loss predictable.

The predictable loss is then shared proportionately by all those in the combination. Not only is uncertainty reduced, but losses are shared. These are the important essentials of insurance. One man who owns 10,000 small dwellings, widely scattered, is in almost the same position from the standpoint of insurance as an insurance company with 10,000 policyholders who each own a small dwelling.

The former case may be a subject for self-insurance, whereas the latter represents commercial insurance. From the point of view of the individual insured, insurance is a device that makes it possible for him to substitute a small, definite loss for a large but uncertain loss under an arrangement whereby the fortunate many who escape loss will help to compensate the unfortunate few who suffer loss.

The Law of Large Numbers

To repeat, insurance reduces risk. Paying a premium on a home owners insurance policy will reduce the chance that an individual will lose their home. At first glance, it may seem strange that a combination of individual risks would result in the reduction of risk. The principle that explains this phenomenon is called in mathematics the “law of large numbers.” It is sometimes loosely referred to as the “law of averages” or the “law of probability.” Actually, it is but one portion of the subject of probability. The latter is not a law at all but merely a branch of mathematics.

In the seventeenth century, European mathematicians were constructing crude mortality tables. From these investigations, they discovered that the percentage of males and females among each year’s births tended everywhere toward a certain constant if sufficient numbers of births were tabulated. In the nineteenth century, Simeon Denis Poisson gave to this principle the name “law of large numbers.”

This law is based on the regularity of the occurrence of events, so that what seems random occurrence in the individual happening simply seems so because of insufficient or incomplete knowledge of what is expected to occur. For all practical purposes the law of large numbers may be stated as follows:

The greater the number of exposures, the more nearly will the actual results obtained approach the probable result expected with an infinite number of exposures. This means that, if you flip a coin a sufficiently large number of times, the results of your trials will approach one-half heads and one-half tails, the theoretical probability if the coin is flipped an infinite number of times.

By: Sarah Martin