Insurance Principles


Insurance is driven by the following concepts and it is important for us to understand them:

Law of Large numbers:

As the number of similar but independent Exposure units increases the relative accuracy of predictions about future outcomes (Losses) based on these exposure units also increases.

For example in Home Owner’s Insurance each Home insured is a Exposure Unit.

Exposure Units such as cars and Houses are independent if they are not subject to the 
same event. 

 Principle of indemnity:

 Insurance is a process of covering the potential losses by providing a financial security to insured persons by bringing them back to the same position before the loss happened. A person cannot be benefited out of the insurance transaction. 
This happens by collecting a small amount called as premiums from a large pool of people with similar exposure and the losses are compensated when there is an unexpected loss for one of the insured.



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