Insurance Principles

The commercially insurable risks share seven common characteristics typically.

1. A great number of homogeneous units of exposure. The large majority of insurance policies of insurance are given for various members of the very large classes. The insurance of car, for example, covered approximately 175 million cars in the United States in 2004 [2]. The existence of a great number of homogeneous units of exposure makes it possible insurers to draw benefit from alleged “the law of the great numbers,” which indeed to declare them which as the number of units of exposure increases, the real results is more and more to become close to the results envisaged. There are exceptions to this criterion. Lloyd of London is famous to ensure the life or the health of the actors, actresses and fôlatre of the figures. The satellite insurance of launching covers the events which are not very frequent. The great policies of commercial commercial property can ensure the exceptional properties for which there is no homogeneous unit of exposure of “”. In spite to fail on this criterion, much of exposures as the latter are generally regarded as insurable.
2. Definite loss. The event which causes the loss which is prone to the insurance would have, at least in theory, to take place at a known time, in a known place, and of a known cause. The traditional example is the death of a policy-holder on a policy of life insurance. Fire, accidents of car, and the damage of workman can all easily answer this criterion. Other types of losses can only be defined in the theory. The occupational disease, for example, can comprise the exposure prolonged to the harmful conditions where no specific moment, place or cause are identifiable. In the best of the cases, the period, the place and the cause of a loss should be rather clear that a reasonable person, with sufficient information, could objectively check each of the three elements.
3. Accidental loss. The event which constitutes the release of a complaint should be fortuitous, or at least apart from the ordering of the recipient of the insurance. The loss should be “pure,” in the sense that it results from an event for which there is only the occasion at the cost. The events which contain the speculative elements, such as ordinary businesses risks, are not generally considered insurable.
4. Great loss. The size of the loss must be signicative prospect for the policy-holders. The premiums of insurance must cover both the cost envisaged of losses, plus the cost to publish and manage the policy, to adjust losses, and to ensure the necessary capital to make sure reasonably that the insurer will be able in measurement with the complaints of wages. For small losses these last costs can be several times the size of the cost envisaged of losses. There is little point by paying such costs unless protection offered has the actual value with a purchaser.
5. Accessible premium. If the probability of an event of policy-holders is so high, or the cost of the so large event, that the resulting premium is large relative with the quantity of protection offered, it is not probable that no matter who ensures himself, even if if on sale. Moreover, while the profession of accountancy formally recognizes in standards of financial financial accountancy (see FAS 113 for example), the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is a no such chance of the loss, the transaction can have the form of insurance, but not the substance.
6. Calculable loss. There are two elements which must be at least estimatable, if not formally calculable: probability of the loss, and the clean cost. The probability of the loss is generally an empirical exercise, whereas the cost has to make more with the capacity of a reasonable person in possession of a copy of the insurance policy of insurance and of a proof of the loss related to a complaint presented within the framework of this policy to make a reasonably definite and objective evaluation of the quantity of the recoverable loss because of the complaint.
7. Risk limited large losses in a catastrophic way. The essential risk is often aggregation. If the same event can cause losses with many policy-holders of the same insurer, the capacity of this insurer to the policies of question becomes forced, not by factors surrounding the various characteristics of a given policy-holder, but by the factors surrounding the sum of all the policy-holders thus exposed. Typically, the insurers prefer to limit their exposure to a loss of a simple event to a certain small part of their authorized capital, on the order of 5%. Where the loss can be agré gée, ou une politique individuelle pourrait produire des réclamations particulièrement grandes, la contrainte capitale limitera un appétit d'assureurs pour les assurés additionnels. L'exemple classique est assurance contre les tremblements de terre, où la capacité d'un garant à la question une nouvelle politique dépend du nombre et de la taille de politiques qu'elle a déjà garanties. Enrouler l'assurance dans des zones d'ouragan, en particulier le long des lignes de côte, est un autre exemple de ce phénomène. Dans des cas extrêmes, l'agrégation peut affecter l'industrie entière, puisque le capital combiné des assureurs et des réassureurs peut être petit comparé aux besoins des assurés potentiels dans les secteurs exposés au risque d'agrégation. Dans l'assurance-incendie incendie commerciale il est possible de trouver le singl e properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.