Insurance is based on the notion of risk, which must be assessed using mathematical and statistical techniques.
The insurance operation
Insurance is a mechanism for sharing risks, so they compensate each other. This is known as the principle of risk pooling.
However, so that the whole system is not jeopardized, the risks integrated into the mutuality must be:
- Homogeneous: it is necessary to bring together a large number of risks of the exact nature, which have the same chances of occurring and which will cause disbursements of the same order;
- Dispersed: avoid grouping risks that are likely to co-occur and in the same place: in this case, compensation could not occur. If all the farmers in the same region are insured against hail, the slightest hailstorm can destroy the crops of all the policyholders and have catastrophic consequences for the insurer.
- Divided: A loss alone must not threaten mutuality.
The use of statistics and the calculation of the contribution
They are essential for insurance to determine the probability of occurrence of the risk. This probability is called frequency. It is also possible to decide on the average cost of a claim.
From these elements, the insurer can then calculate the amount of the balance contribution, that is to say, the average amount necessary to offset the risks between them.
Risk division techniques
When a risk is too significant to be covered by the insurer alone (industrial risks, refineries, etc.), the latter uses two techniques for dividing the risks, which can be implemented simultaneously: co- reinsurance.
Co-insurance consists of a proportional sharing of the same risk between several insurers. Reinsurance is an operation by which an insurance company (the assignor) insures itself with another company (the reinsurer or the assignee) for part of the risks it has assumed.
Refers to a contract engaging the responsibility of several insurers according to their participation in the agreement. While guaranteeing their independence (no solidarity between them). One or more insurers can be named “lead insurers.” They then acquire the status of the interlocutor(s) of the insured.
The regulations impose stringent management rules on insurance companies. Guaranteeing policyholders that the insurer will always be able to meet its contractual commitments.
The insurance contract (or policy): the document that binds the insurer and the insured
The insurance contract is based on reciprocal commitments that bind the insurance company. And the insured and whose characteristics are detailed in the contractual documents:
- The terms and conditions are common to all policyholders covered by the same insurance company for a given type of contract (comprehensive home, car insurance, etc.). They explain how the contract works and detail all the guarantees;
- The unique conditions personalize the contract and adapt the guarantees to the risk covered.