By definition insurance is “a method by which interested members
of a society can band together and collect funds to pay losses suffered later by members of the group.”
There are other definitions of insurance available, some are
related to its legal aspects, others to its economic importance and
still others to its social effects. However, for the purpose of this book
the definition given above is sufficient.
There are many stories as to when, where and how insurance
began. One of some interest concerns the primitive Caveman who
faced the possibility of loss of their goods and belongings at the
hands of enemies and animals. The Cavemen found that when they
left their caves for an extended hunting trip, upon their return, they
would sometimes discover that one of the members’ caves had been
stripped of its belongings probably by animals or an enemy.
Finally a wise Caveman suggested that each put part of his own
goods into the cave of each of the others. Then the Caveman said, if
one cave is raided and all of its contents lost, all of the members
would lose part of their goods, but none would lose all of their goods.
Thus, the concept of insurance was introduced—to spread risk
among many so that no single member would lose everything.
Insurance has developed throughout the world in its commercial
form for over 300 years. The insurance industry in the United States
dates from the time of the Revolutionary War. Today there are over
four thousand property and liability insurance companies and over
two thousand life insurance companies operating in this country.What is Risk?
Another term that is commonly used in the insurance industry is
Risk. A generally accepted definition of risk is “uncertainty as to
This definition of risk as used in insurance indicates that while it
can be assumed that some individual will suffer a loss, there is
uncertainty as to which individual will be affected in any given
circumstance and at what time.
Insurance is often accused of being a form of gambling. However,
there is an important difference. The concept of risk and uncertainty
plays an important part in this difference.
One important factor which involves insurance is that there must
be a certainty of loss with a certainty of no gain. This is interpreted to
mean that the expense of the premium has become a certain loss
while the no gain means that only as much as has been lost will be
repaired, replaced or have its actual cash value paid.
Therefore one may lose but one may never gain from the
insurance industry’s product. This concept is what removes
insurance from the area of gambling. In gambling there is both a
chance of loss and a chance of gain.
What Makes a Risk Insurable?
It is generally accepted that there are four criteria or requirements
which must be fulfilled in order that a risk can be considered to be
insurable. These four are:
It must be one of a large homogeneous group. — This means that
there are a large number of similar units which are exposed to loss in
a relatively similar fashion and as a result, the law of large numbers
can operate. This law allows the statistical process called probabilityto be applied in determining the probable number of losses that will
occur and the amount of premium needed for the insurance
Any loss must be measurable in dollars and cents. — Since this is
an economic loss, there must be a money value which can be
established on the goods and services involved in the potential loss.
Not subject to catastrophic loss. — To be insurable, there has to
be an element of an accidental happening to one of the many units
exposed. If all the items to be considered were subject to a
catastrophic loss; i.e., all located in the path of a weakened dam,
then the factors of chance and probable loss could not apply. When
they cannot apply, then the risk would not be insurable.
The loss must be a fortuitous (accidental) happening. —
Intentional acts by a responsible party cannot be insured because
they would conflict with the projections of uncertainty and probability.
There must always be uncertainty as to which unit may