INSURANCE AND RISK
Explain each of the following characteristics of a typical insurance plan.
Pooling of losses: "pooling is the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss" This principle connote that a different persons exposed to similar risks come together and make contributions towards a pool of funds. If a person from the group actually suffers a loss on account of such risk, he receives compensation from the same pool of funds. The advantage on the pooling of losses is that, the risk of few people is spread over a larger group of people, all of whom are exposed to the similar risk and since the number of insured individuals is larger, insurance companies use statistical tools such as standard deviation to project their actual loss within a given class.
Not all the insured individuals will suffer losses at the same time and also is probable that some of the individuals on the group will not suffer loss at all.
Payment Of Fortuitous Losses means that the peril occurs as a result of chance or is unexpected or accidental. No one should be able to make the risk happen. Example if a person set fire to his house intentionally and asks the insurance company to compensate for the loss. This would be taking unfair advantage of an arrangement.
Risk Transfer is when we transfer the pure risk to a third party on the majority of the cases to insurers. Example homeowners transfer the risk of destruction when the acquire homeowners insured.
Indemnification means restoring the insured in the estimated financial position, as he/she was in prior the occurrence of the loss. The amount amount paid out, as a claim...