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The true nature of insurance is often confused. The term “insurance” is sometimes used for a fund that is accumulated to meet uncertain losses. For example, a specialty store dealing in seasonal goods should add to its price at the beginning of the season to create a fund to cover the possibility of losses at the end of the season, when the price drops to clear the market. Needed Similarly, life insurance quotes take into account the value of the policy after collecting premiums from other policyholders.
This method of meeting risk is not insurance. What constitutes insurance to meet uncertain loss requires more than just the accumulation of money. The transfer of risk is sometimes called insurance. A store that sells television sets promises to service the set for one year free of charge and the television’s glory to replace the picture tube proves too much for its fragile wiring. Seller may refer to this Agreement as the “Insurance Policy”. It is true that it represents a transfer of risk, but it is not insurance.
An adequate definition of insurance should include the creation of funds or the transfer of risk and the combination of a large number of separate, independent risks of loss. Only then there is true insurance. Insurance can be defined as a social tool to reduce risk by combining a sufficient number of risk units to anticipate losses.
The estimated loss is then shared proportionately by all those in the combination. Not only has uncertainty reduced, but loss has also been shared. These are the important essentials of insurance. A person who has 10,000 small dwellings, widely scattered, is in about the same position from an insurance point of view as an insurance company with 10,000 policyholders, each of whom has one small dwelling.
The first case may be the subject of self-insurance, while the latter represents commercial insurance. From the point of view of the insured, insurance is a device that makes it possible for him to substitute a small, certain loss for a larger but uncertain loss under an arrangement whereby many lucky people who escape loss, few unfortunate losses. help to compensate. Those who are harmed.
law of large numbers
To reiterate, insurance mitigates risk. paying premium on a homeowners insurance The policy will reduce the likelihood that a person will lose their home. At first glance, it may seem strange that a combination of individual exposures would lead to a reduction in risk. The principle that explains this phenomenon is called in mathematics the “law of large numbers”. This is sometimes called the “law of averages” or the “law of probability”. Actually, it is a part of the subject of probability. The latter is not a law but merely a branch of mathematics.
In the seventeenth century, European mathematicians were constructing crude mortality tables. From these investigations, he found that the percentage of males and females in each year’s births tended everywhere to a certain constant if a sufficient number of births were tabulated. In the nineteenth century, Simeon Denis Poisson named this principle the “law of large numbers”.
This law is based on the regularity of the occurrence of events, so that what appears to be a random occurrence to a person may simply appear so because of insufficient or incomplete knowledge of what is expected to happen. For all practical purposes the law of large numbers can be stated as:
The higher the number of exposures, the closer the actual results obtained are to the expected expected results with more exposures. This means that, if you flip a coin a sufficient number of times, the results of your tests will reach one-half heads and one-half tails, the theoretical probability if the coin is flipped an infinite number of times.
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