Page 14 - Life Assurance

Contrast the preceding incident if Samy
goes to the insurance company and insures his
house for 5,000 pound and the insurer charges a
premium of 50 pound. Samy had the risk of loss
from having his house destroyed by fire before he
entered into the insurance transaction. He has an
insurable interest in his house. Afterward he has
eliminated the risk of loss from this source in
return for a premium of 50 pounds. He has
exchanged a large uncertain loss for a small but
certain loss, namely, the premium.

1/2/3 The principle function of Insurance:

The main function of insurance is risk
bearing. The financial losses of the individuals
are distributed over the many.

In fire insurance, for example, the
policyholders pay premiums into a common
pool, out of which those who suffer loss are
compensated. The amount of the premium is
fixed according to individual circumstances.
Thus risks are assessed and rates of premium
graduated so that, if one type of risk is likely to
involve more frequent or costly calls on the pool
than other the rate of premium will be higher.

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