Principles of Risk Management and Insurance, 13th Edition

Basic Characteristics of Insurance

Based on the preceding definition, an insurance plan or arrangement typically includes the following characteristics:

• Pooling of losses

• Payment of fortuitous losses

• Risk transfer

• Indemnification

Pooling of Losses

Pooling or the sharing of losses is the essence of insurance. Pooling is the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss. In addition, pooling involves the grouping of a large number of exposure units so that the law of large numbers can operate to provide a substantially accurate prediction of future losses. Ideally, there should be a large number of similar, but not necessarily identical, exposure units that are ...