Elements of an insurable risk
MR. WATSON: Elements of an insurable risk. Not all risks are insurable. To be insurable:
- The loss must be due to chance. What does that mean? It means something that may happen or may not. What does that mean? Beverly -- could Beverly die tomorrow? There's a chance she might die and a chance she might not. If we knew Beverly would die today, would we insure her? No. No. There's got to be a chance.
- The loss must be definite and measurable. Definite as to time and place.
- The loss must be predictable based upon the law of large numbers, mortality and morbidity tables.
- The loss cannot be catastrophic. And that means catastrophic to the insurance company. They are not going to insure something that could possibly bankrupt them.
- The loss to the exposure must be large, large enough to be measured using the law of large numbers. The loss to the group must be accurate enough to be predicted, and the loss to the insured must be due to chance.
- Be randomly selected. They have to be all over the place. We have to have a million men age 30 from all walks of life. Are we going to insure a million men if they are asbestos inhalers? No. We need a lot of men who are not asbestos inhalers, guys to pay for the guys who are asbestos inhalers, in a riskier occupation. This brings up something called "adverse selection ", a tendency for less favorable risks (sick people) to seek or continue insurance. Insurance companies don't like this.
MR. WATSON: This dialogue method has been highly successful. We have left in questions that students have actually asked. It helps with retention and understanding. Every chapter is going to be like this, save chapter four. We shall crawl through these chapters like a fleeing herd of turtles. Repetition, repetition, repetition. The goal? Pass the exam. Keep it simple. We wish not to graduate magna cum laude, simply to graduate, "Oh, thank the Lordy"!
In case you didn't download these review notes at the beginning of the chapter, here they are again.
