Page 32 - Insurance Times May 2023

Basic Elements of

law of probability

or law of large

numbers R. Venkatesan
BA BGL AII DIL

insurance

The theory of probability (also known as probability theory or theoretical probability) is a statistical
method used to predict the likelihood of a future outcome. This method is used by insurance
companies as a basis for crafting a policy or arriving at a premium rate.

Part.II Lately, the co-operation took another form where it was
agreed between the individual and the society to pay a
certain sum in advance to be a member of the society.
Applicability of probability in insurance:
The society by accumulating the funds, guarantees
payment of certain amount at the time of loss to any
Principles of Insurance:
member of the society. The accumulation of funds and
The insurance is based upon (i) Principles of Co-operation and, charging of the share from the member in advance
(ii) Principles of Probability. became the job of one institution called insurer.

Now it has become the duty and responsibility of the insurer
Principles of Co-operation:
to obtain adequate funds from the members of the society
Insurance is a co-operation device. If one person is
to pay them at the happening of the insured risk. Thus,
providing for his own losses, it cannot be strictly insurance
the shares of loss took the form of premium. Today, all the
because in insurance, the loss is shared by a group of
insured give a premium to join the scheme of insurance.
persons who are willing to co-operate. In ancient period, Thus, the insured are co-operating to share the loss of an
the persons of a group were willingly sharing the loss to
individual by payment of a premium in advance.
a member of the group. They used to share the loss to a
Principles and Theory of Probability:
member of the group.
The theory of probability (also known as probability theory
They used to share the loss at the time of damage. They
or theoretical probability) is a statistical method used to
collected enough funds from the society and paid to the
predict the likelihood of a future outcome. This method
dependents of the deceased or the persons suffering
is used by insurance companies as a basis for crafting a
property losses.
policy or arriving at a premium rate. It also aims to
The mutual co-operation was prevailing from the very establish patterns for the occurrence of various types of
beginning up to the era of Christ in most of the countries. events by using mathematical or statistical methods.
The Insurance Times May 2023 29