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Insurance Defined from the Viewpoint of the Individual
Based on the preceding description, we may define insurance from the individual’s viewpoint as follows:
From an individual point of view, insurance is an economic device whereby the individual substitutesasmallcertaincost(thepremium)foralarge uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance.
The primary function of insurance is the creation of the counterpart of risk, which is security. Insurance does not decrease the uncertainty for the individual as to whether the event will occur, nor does it alter the probability of occurrence, but it does reduce the probability of financial loss connected with the event. From the individual’s point of view, the purchase of an adequate amount of insurance on a house eliminates the uncertainty regarding a financial loss in the event that the house should burn down. Some people seem to believe that they have some how wasted their money in purchasing insurance if a loss does not occur and indemnity is not received. Some even feel that if they have not had a loss during the policyterm,their premium should be returned. Both view points constitute the essence of ignorance. Relative to the first,we already know that theinsurancecontractprovidesavaluablefeaturein the freedom from the burden of uncertainty. Evenif a loss is not sustained during the policyterm,theinsured has received something for the premium: the promise of indemnification if a loss had occurred. With respect to the second, one must appreciate the fact that the operation of the insurance principle is based on the contributions of the many paying the losses of the unfortunate few. If the premiums were returned to the many who did not have losses, there would be no funds available to pay for the losses of the few who did. Basically, then, the insurance device is a method of loss distribution. What would be a devastating loss to an individual is spread in an equitable manner to all members of the group, and it is on this basis that insurance can exist.
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