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Before undertaking the study of insurance, it is necessary to have an understanding of some of the basic terms used in that study.

Cer­tain definitions are essential: (1) Riskuncertainty concerning loss; (2) degree of riskthe accuracy with which a given loss can be predicted; (3) chance of lossthe probable number of times in any given number of exposures that loss will occur; (4) perilthat which can cause loss; (5) hazarda condition that may create or increase the chance of loss; and (6) lossthe unintentional parting with value.

The real cost of risk to society goes on whether there is ever an actual physical loss or not, such as when life insurance basics come into play. Economic fear, which causes an uneco­nomic allocation of resources, is the real cost. By eliminating this fear to a great extent, insurance permits greater production and a higher standard of living for all.

There are five basic ways in which risk may be handled: (1) It may be assumed, with or without the provision of a reserve fund; (2) the hazard may be reduced; (3) the loss may be reduced; (4) the risk may be shifted, as in hedging, subcontracting, surety bond­ing, or incorporation; and (5) risk may be reduced.

This may be done through combination of risks to permit more accurate predic­tion. The loss, when predicted, is then shared proportionately by all members of the group. It is on the combination of risks and the shar­ing of losses that insurance is based.

To be suitable for insurance, a hazard must meet certain conditions. First of all, the hazard must threaten a large, homogeneous group. It must produce a loss that is definite in time and place and that is of accidental origin. Even with companies that offer no exam life insurance rates, a certain probability of loss is still ascertainable.

Ideally, the loss should be beyond the control of the insured. The hazard must be capable of producing a loss large enough to be economically disturbing to the individual, yet the cost of the insurance must be low enough to be within the insured’s reach.

It must be possible to predict the losses with an accuracy that will permit the insurance company to set up a pre­mium scale sufficient to pay losses as they occur. Finally, losses must not occur to a majority of the insureds at the same time. If there is a possibility of a catastrophic loss, there is a possibility of having an insolvent insurance company.           

Besides the obvious function of providing a mechanism for the sharing of losses, insurance performs other important social func­tions. Insurance companies try to prevent losses before they occur. Much time, effort, and money have been spent by the companies in furthering their loss-prevention programs.

Insurance relieves busi­nessmen of some of their business risks. In the home, homeowner insurance and affordable life insurance helps to eliminate worry. Insurance as a basis of credit is of vast signifi­cance, and the growing importance of insurance companies as a tremendous power in the economic life of the country through their vast investment holdings must not be overlooked in assessing the insurance industry’s contribution to our social world.

The contributions of the insurance industry are not without their costs. The insurance industry consumes productive labor, space, and capital. It may lead to willful destruction of lives and property and to carelessness in the maintenance of property. All in all, however, the social benefits of insurance far outweigh its social cost.

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