%20for%20a%20large%20uncertain%20financial%20loss(the%20contingency%20insured%20against)%20that%20would%20exist%20if%20it%20were%20not%20for%20the%20insurance.The%20primary%20function%20of%20insurance%20is%20the%20creation%20of%20the%20counterpart%20of%20risk,%20which%20is%20security.%20Insurance%20does%20not%20decrease%20the%20uncertainty%20for%20the%20individual%20as%20to...){kind=link}
What is insurance and the primary function in the society?
Insurance is an economic device where the individual substitutes a small certain
cost(the premium) for a large uncertain financial loss(the contingency insured against) that would exist if it were not for the insurance.The primary function of insurance is the creation of the counterpart of risk, which is security. Insurance does not decrease the uncertainty for the individual as to whether the event will occur, nor does it alter the probability of occurrence, but it does reduce the probability of financial loss connected with the event. From this view point, the purchase of an adequate amount of insurance on a car eliminates the uncertainty regarding a financial loss in the event that the car should damage.
Some people seem to believe that they have some how wasted their money in purchasing insurance if a loss does not occur and indemnity is not received. Some even feel that if they have not had a loss during the policy term, their premium should be returned. Both view points constitute the essence of ignorance. Relative to the first, we already know that the insurance contract provides a valuable feature in the freedom from the burden of uncertainty. Even if a loss is not sustained during the policy term, the insured has received something for the premium: the promise of indemnification if a loss had occurred. With respect to the second, one must appreciate the fact that the operation of the insurance principle is based on the contributions of the many paying the losses of the unfortunate few. If the premium were returned to the many who did not have losses, there would be no funds available to pay for the losses of the few who did.
Basically, then, the insurance device is a method of loss distribution. What would be a devastating loss to an individual is spread in an equitable manner to all the members of the group, and it is on this basis that insurance can exist.
In addition to eliminating risk at the level of the individual through transfer, the insurance mechanism reduces risk(and the uncertainty related to risk) for society as a whole. The risk the insurance company faces is not merely a summation of the risks transferred to it by individuals, the insurance company is able to do something that the individual cannot, and that is to predict within rather narrow limits the amount of losses with absolute precision, it would face no possibility of loss.
It will collect each individual's share of the total losses and expenses of operation and use these funds to pay the losses and expenses as they occur. If the predictions are not accurate, the premiums that the insurers has charged may be inadequate.
The accuracy of the insurers predictions is based on the law of large numbers. By combining a sufficiently large number of homogeneous exposure units, the insurer is able to make predictions for the group as a whole. This is accomplished through the theory of probability.
What is insurance and the primary function in the society?
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