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City College

Lesson 1
Purpose of Insurance

Wall Street Instructors



Life and health insurance evolved to provide a practical solution to the economic losses associated with death, sickness and accidents. It does so through an insurance policy, which is a device to accumulate funds to meet these losses. Insurance is based on "risk pooling" and the "law of large numbers", the principles that allow insurers to spread risks among thousands of individuals and to predict losses with reasonable accuracy.

Insurance transfers risk, which is one of the most effective ways to deal with risk and its losses. Not all risks are insurable, however. A risk must contain certain elements before it can be insured: for example, it must be a pure risk; the loss it entails must be due to chance; the loss must be definite and measurable; the loss must be predictable; the loss cannot be catastrophic and the loss exposure must be part of a large group, randomly selected. In the case of life insurance the risk is not if death will occur, but rather when.

The true worth of insurance lies in its ability to protect human life values the value associated with an individual's earnings potential and to provide financial security.

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Lesson Objectives

After completing this lesson, you should be able to:

  • list the parties to an insurance contract
  • understand the basic principles of insurance
  • differentiate various types of risks, perils and hazards
  • list four methods to manage risk
  • identify the factors that make a risk "insurable"
  • explain the development of risk pooling and the Law of Large Numbers

 

Reading Assignment

Florida Life and Health Study Manual, Chapter 1

 

Questions or Comments?

 

 

Key Concepts

In preparing for their licensing examination, students should be familiar with the following concepts:

  • risk
  • methods of handling risk
  • risk pooling
  • elements of insurable risk
  • law of large numbers
  • insurable risk
  • hazard
  • peril
  • risk transference
  • risk avoidance
  • risk retention
  • risk reduction

 

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