Risk Sharing through Insurance Liability
Risk Sharing through Insurance Liability
The existence of risk creates the need, or at least the desire, for insurance. So what is insurance? Insurance is a legal and contractual arrangement for risk sharing, the spreading of risk among people who share a common potential for financial loss. The insurance contract is heavily regulated by state laws because of public policy considerations. Of special concern are the requirements of offer and acceptance and the requirement of an insurable interest in the insured before an insurance policy can be purchased.
Risk cannot be totally avoided. Automobile accidents occur with alarming regularity, normally causing substantial property damage to at least one automobile and frequently to more. Fires burn down homes or businesses, presenting the owner with the potential for economic ruin. People die, leaving behind unpaid bills, and very often a family with one less wage earner. Or the death leaves a gaping hole in the management of the business that employed and relied on the deceased. In such case occurs the business liability insurance.
When a loss occurs as a result of risk, the victim must somehow finance the loss. There are two basic ways to do so: either through self-financing or through risk-sharing. Self-financing is expensive and potentially disastrous. The feared event may occur before the self-financing person has been able to amortize fully for the potential loss. Amortize here means to provide for the gradual extinguishing of a debt by contributing funds to a sinking fund or similar account. Risk sharing therefore is a more satisfying alternative to many people.
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