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13
Chapter Outline
As stated in an earlier chapter, insurance is a mechanism through which certainty replaces uncertainty. This occurs when many people exposed to loss from a particular hazard contribute to a common fund so those who suffer a loss from that cause can be compensated. The certainty of losing the premium replaces the uncertainty of a larger loss. For a plan of insurance to function, the pricing method needs to measure the risk of loss and determine the amount to be contributed by each participant. The theory of probability provides such scientific measurement.
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