Page 291 - IC38 GENERAL INSURANCE
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Example
The enactment of law governing workmen‟s compensation in the case of
accidents can raise the amount of liability payable considerably.
A major concern in insurance is the relationship between risks and associated
hazards. Assets are classified into various risk categories on this basis and the
price charged for insurance coverage [known as the premiums] would increase if
the susceptibility to loss, arising as a result of the presence of associated
hazards, is high.
3. Mathematical principle of insurance (Risk pooling)
The third element in insurance is a mathematical principle that makes insurance
possible. It is known as the principle of risk pooling.
Example
Suppose there are 100000 houses exposed to the risk of fire that can cause an
average loss of Rs 50000. If the chance of a house catching fire is 2 in 1000 [or
0.002] it would mean that the total amount of loss suffered would be Rs
10000000 [=50000 x 0.002 x 100000].
If an insurer were to get the owners of each of the hundred thousand houses to
contribute Rs 100 and if these contributions were to be pooled into a single
fund, it would be enough to pay for the loss of the unfortunate few who
suffered from the fire.
The required amount of individual contribution is evident from the
calculation below
100000 x 100 = Rs 10000000
To ensure that there is equity [fairness] among all those being insured, it is
necessary that the houses should all be similarly exposed to the risk.
a) How exactly does the principle work in insurance?
Example
Mr. Shyam, who has a factory, with plant, machinery and inventory worth Rs 70
lakhs, wants to insure them with an insurer. The chance that there would be
loss or damage to the factory and its contents from fire or other insured perils is
7 out of 1000 [0.007]. Both Mr. Shyam and the insurer are aware about this.
How are their positions different and why does Shyam want to insure?
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