The Probability Can Be Calculated
The level of insurance premium that is based on the prediction of the future. The forecast is based on estimates of probability. This probability is generally based on the experience of the past. This is the way used by insurance companies to estimate probabilities. But this way is only useful when it can be considered that the determinants of the future it will be the same as the determinants of the past. If not, then the experience of the past could not be used as a guideline for the future. If the probability of the insured losses that cannot be quantified, then it risks cannot be insured.
Bulk and Homogeneous
The main requirement to be insured is mass, meaning that there should be a large number of units. In terms of car insurance, there must be a large number of cars. In life insurance, there must be a large number of units. In terms of car insurance, there must be a large number of cars. In life insurance, there must be a large number of people. A car insurance company will not be able to endure a dozen cars, and a life insurance company is not going to be able to take away a dozen people. As already outlined, to obtain an accurate probability estimates required observation of large numbers of events. After that loss probability is known, then it is relied upon to forecast, but the forecast is only valid for a large group. Insurance companies are no more capable of predicting the loss of a certain someone on the person itself.
Some of the "large group" of it? for the purpose of insurance, the number of units that depend on supplies the insurer bear the risk of deviation from the estimate (expectations). For example, the probability of the occurrence of a fire House is 1/1000. an insurance company might bear risks for 1000 homes with an estimated will occur one claim for that year. If there is no fire occur, there are 100% deviation from the estimate. Conversely, if the two houses burned in that year, then claims to be paid to 2 times the predicted. This burden is too heavy for the insurer.
By increasing the number of homes that insured be 10000 pieces, then
the estimated loss increases to 10 pieces but also experience increased
stability, meaning that actual losses may range from 5 to 15, in
percentage lapses is smaller than the Group of 1000 houses. Also, if the
more this group increased to 100,000 fruit home, fire real differences
with the predicted increase in absolute numbers, but declined in.
Notions of homogeneous here does not mean 100% the same as no 2 objects or people that are exactly the same. However, the units within a group shall equal enough to get an accurate forecast.
