Nature & Functions of Insurance
In its simplest aspect, insurance has two
fundamental characteristics: Transfer of risk
from the individual to the group. Sharing of
losses on some equitable basis.
Operation of Insurance Illustrated
1.1,000 dwellings valued at $100,000 each.
2.Each owner faces risk of a $100,000 loss.
3.Owners agree to share losses that occur.
4.If one house burns (total loss) each owner
pays $100 ($100 X 1,000 = $100,000).
5.This is pure assessment mutual insurance.
Operation of Insurance Illustrated
6.Potential difficulty:
some members might refuse to pay their assessment.
7.This problem can be overcome by requiring
advance payment for predicted future losses
(based on past experience).
8.If 2 total losses are predicted, each
owner’s cost is $200. 9.
If we add $100 for a cushion and for operating
expenses, the cost is $300.
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