Principles of Risk Management and Insurance, 13th Edition

SUMMARY

• There is no single definition of insurance. However, a typical insurance plan contains four elements:

  • – Pooling of losses

  • – Payment of fortuitous losses

  • – Risk transfer

  • – Indemnification

  Pooling means that the losses of the few are spread over the group, and average loss is substituted for actual loss. Fortuitous losses are unforeseen and unexpected, and they occur as a result of chance. Risk transfer involves the transfer of a pure risk to an insurer. Indemnification means that the victim of a loss is restored in whole or in part by payment, repair, or replacement by the insurer.

• The law of large numbers states that the greater the number of exposures, the more likely the actual results will approach the expected results. The law of ...