Question

Which of the following are fundamental characteristics of insurance? I. Probability (possibility and predictability of a loss) II. Law of large numbers III. Transfer of risk from an individual to a group IV. Insurance is a form of speculation (a) I and II only (b) I, II, and IV only (c) I, II, and III only (d) IV only (e) I, II, III, and IV only

Answer 1

I. Probability (possibility and predictability of a loss) ---- This is a true statement, since the cost benefit analysis of insurance depends on the possibility and predictability of a loss.

II. Law of large numbers ......... This is a true statement. The basic priciple upon which the total system of insurance works is there premium payers in large numbers and claimers in small numbers.

III. Transfer of risk from an individual to a group ----- True .... other way of explaining (statement - II above)

IV. Insurance is a form of speculation .............False........... Insurance is only to mitigate the possible loss, but not to gain from speculations. That means one's ability to predict the future does not give any speculative gains.

(c) I, II, and III only