Mataracy
VIP Contributor
RISK TRANSFER
Insurance is a risk transfer mechanism whereby the individual or business enterprise can shift some of the uncertainty of life on to the shoulders of others. In return for a known premium, usually a very small amount compare med with the potential loss, the cost of that loss can be transferred to an insurer.
Without insurance, there would be a great deal of uncertainty experienced by an individual or an enterprise, not only as to whether a loss would occur, but also as to what size it would be if it did occur.
For example, a house owner will realize that each year several hundred houses are damage by fire. His uncertainty is whether in the coming year his house will be one of those damaged, and he is also uncertain, whether, given that hr will be one of the unlucky ones, his loss will amount $100 or so for the redecoration of his kitchen or whether the house will be gutted and cost him many thousands of dollar to repair.
Even though the probability of their house becoming one of the loss statistics is extremely low most house owners nevertheless elect to spend, say, $250- $300 on house insurance, rather than face the extremely remote possibility of losing a house worth $200,000.
In the case of business enterprises, the values exposed to loss are usually much higher, but in addition the hazards inherent in their operations are often higher than those of the house owner, and so the premium charged is likely to be substantially higher than that for a house.
Even in these circumstances the majority of firms prefer to pay a known cost of premium for the transfer of risk, rather than face the uncertainty of carrying the risk of loss.
Insurance is a risk transfer mechanism whereby the individual or business enterprise can shift some of the uncertainty of life on to the shoulders of others. In return for a known premium, usually a very small amount compare med with the potential loss, the cost of that loss can be transferred to an insurer.
Without insurance, there would be a great deal of uncertainty experienced by an individual or an enterprise, not only as to whether a loss would occur, but also as to what size it would be if it did occur.
For example, a house owner will realize that each year several hundred houses are damage by fire. His uncertainty is whether in the coming year his house will be one of those damaged, and he is also uncertain, whether, given that hr will be one of the unlucky ones, his loss will amount $100 or so for the redecoration of his kitchen or whether the house will be gutted and cost him many thousands of dollar to repair.
Even though the probability of their house becoming one of the loss statistics is extremely low most house owners nevertheless elect to spend, say, $250- $300 on house insurance, rather than face the extremely remote possibility of losing a house worth $200,000.
In the case of business enterprises, the values exposed to loss are usually much higher, but in addition the hazards inherent in their operations are often higher than those of the house owner, and so the premium charged is likely to be substantially higher than that for a house.
Even in these circumstances the majority of firms prefer to pay a known cost of premium for the transfer of risk, rather than face the uncertainty of carrying the risk of loss.