Management of Risk by Insurer - Insurance Business and Market, Principles of Insurance Video Lecture | Principles of Insurance - B Com

meet Arne he works for an insurance
company
Arne works as an actuary and his job is
very important he's an expert in higher
level mathematics probability and
statistics he uses his math skills to
help his company assess uncertainty and
risk so that the company can decide
whether it wants to offer insurance and
at what price Arne is crucial to the
insurance company's risk management
which is the process of identifying
assessing and mitigating risks
Arnie's work helps an insurance company
decide whether to provide insurance to a
person or business through issuance of
an insurance policy an insurance policy
is a special type of contract that
transfers risk from the policyholder to
the insurance company in exchange for a
fee called an insurance premium
insurance policies often have
deductibles which are out-of-pocket
amounts an insured party must pay before
the policy kicks in there are also
limits to the amount an insurance
company will pay pursuant to the policy
finally the policy will have exceptions
and exclusions to the coverage insurance
companies are in business to make money
and will not assume risk if they believe
it is very likely to occur or is
inevitable one of the most important
tools in Arnie's arsenal is the law of
large numbers this statistical law
states that as the number of exposures
increase the more accurate the
prediction of the exposure happening in
the future will be there will be less of
a deviation from the actual losses
incurred and the expected losses and the
credibility of the prediction increases
let's use an example to illustrate the
point let's say that we have samples of
100 men 1,000 men 100,000 men and 1
million men who are all aged 65 with the
same general risk characteristics such
as non-smokers of normal weight and with
no evidence or history of cancer or
heart disease if you follow these men
through one year you will find that a
certain percent dies in each group over
the year the law of large numbers
dictates that the percentage of men that
die in the 1 million man sample will be
more accurate than the 100 man sample
why is this important for life insurance
companies because insurance companies
gamble that they will have to pay less
in claims than they will bring in
through premiums arnie makes sure that
through his mathematical prowess that
the odds favor the house or the
insurance company if the odds aren't
good then a policy will be denied or the
premium will be very high to compensate
for the high degree of risk this also
means that the more units you insure the
less important each unit is in
calculating the overall exposure to loss
for example if Arnie's company has a
small amount of policy's say 100 freak
occurrences also known as actuarial
abnormalities can cost the company
dearly on the other hand if you have a
large risk pool such as 1 million
policies a freak occurrence doesn't
affect the overall loss exposure all
that much this is why group insurance is
cheaper the larger the pool
you