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Insurance In South Africa
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Principle Of Insurance
By adel khamis hassan
Principles of insuranceCommercially insurable risks typically share seven common characteristics.
Insurance---A large number of homogeneous exposure units
The vast majority of policies are provided for individual members of very large classes.
Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.
The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyds of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch covers events that are infrequent.
Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Insurance---Definite Loss
The event that gives rise to the loss that is subject to should, at least in principle, take place at a known time, in a known place, and from a known cause.
The classic example is death of an insured on a life policy.
Fire, automobile accidents, and worker injuries may all easily meet this criterion.
Other types of losses may only be definite in theory.
Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable.
Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Insurance---Accidental Loss
The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance.
The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost.
Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Insurance---Large Loss
The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims.
For small losses these latter costs may be several times the size of the expected cost of losses.
There is little point in paying such costs unless the protection offered has real value to a buyer.
Insurance---Affordable Premium
If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative
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