Insurance Means

Insurance Means

Insurance, the means by which risks are shared between many people or institutions who face them, so that in the event of a contingency befalling an individual he is compensated for his loss out of the premiums paid by all insured against it. People who insure against a risk which never befalls them secure peace of mind and sometimes avoid the need to hold liquid assets or stable securities to enable them to meet the cost of the contingency.

The main forms of insurance are marine, life, fire and accident. Marine insurance is the oldest, examples existing in the fourteenth century, if not before. The scope of insurance has been extended to cover sickness, accident, burglary, loss of employment and even loss resulting from inclement weather (I pluvius insurance').

Insurance is sold by commercial firms (and so-called non-profit-making, 'mutual' organizations), which charge premiums based on calculations of the risk involved plus administrative costs and a profit margin. If experience shows the risk is underestimated premiums are increased. Premiums for life assurance are calculated from actuarial tables giving expected length of life for men and women at different ages, with possible adjustments for family and medical records, occupation, personal habits and so on. Some life assurance policies operate on what is called a mutual basis, under which a proportion of total profits is allocated to policy-holders who hold 'with profit' policies (on which the premium is a little higher than for 'without profit' policies) in proportion to the sums assured. Over a period in which general business conditions are buoyant such mutuality allows policy-holders to enjoy a share in the high profits earned on investments made with theft premiums and the bonus will help to cushion the effect of inflation on the real value of the sums assured.

In addition to insurance provided commercially there are now in most countries extensive social insurance systems administered by the state to cover such contingencies as .php�>unemployment, sickness and old age. Very often these schemes differ from insurance proper because the benefits or sums assured are not met out of past premiums accumulated in a fund but out of current premiums and general taxation. The former schemes are based on various methods of 'funding ', the latter on 'assessmentism' (the current premiums are calculated by 'assessing' the current cost of benefits).

Insurance companies operate on the basis of the law of large numbers; they must attract a large enough number of insurers against a risk to bring the law into operation and spread the risk widely. Economic decision-taking is much concerned with risk; when a risk is calculable and therefore can be analysed with the help of the theory of probability it can most likely be insured against. In this way the main economic function of insurance is to narrow the area of risk-taking undertaken by an eItrerene2n' or firm enabling it to convert part of a risk into a contractual cost, the insurance Premium.

Further reading European Economic - European Economic Area


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