INSURANCE (OF. enseuranee, from enseur cr. to insure, from en, in sure, from Lat.
sccurus, free from care, from se-, without cura, care). Insurance must be differently defined ac cording to the aspect of it which is under consid eration. Every person who embarks his capital in any kind of industrial activity is obliged to make accumulations to replace that part of it which is used up in the productive operation. Some of these accumulations are made to meet losses which are certain and definite both in time and in amount. Such accumulations should be large enough to replace the capital used up and no larger. Other accumulations arc made to meet losses of a more or less uncertain character. Such accumulations are. for the entire group engaged in any line of industrial activity, larger than the losses, and the excess of accumulation over loss varies directly as. the degree of uncer tainty. The accumulations of an individual to meet uncertain losses constitute his insurance fund, and so far as he makes such accumulations lie may he said to insure himself. From this point of view insurance is the accumulation of funds to meet uncertain losses.
One person whose property is exposed to a risk of some kind may be able to transfer that risk to another person for a consideration. The lat ter person undertakes to make good to the former any loss which he may suffer from certain specified accidental causes. The person guar anteeing the reimbursement for such accidental loss may be said to insure against the loss. From this point of view insurance is the trans fer of an existing risk from the person exposed to it to another person or group of persons.
When one person merely assumes the risk of some other person. there is little or no social gain from the transaction. Whatever tion the former would have had to make if lie had carried his own risk. the latter must make after he assumes the risk. The burden which the risk imposes on society remains unaffected. If, however, the risks of many individuals are brought together in a group, a new principle is brought into play. The uncertainty as to the amount of loss to be expected steadily diminishes as the number of risks included in the group in creases. Thus an insurance company, which has assumed the risks of thousands of individuals, is exposed to much less uncertainty as to Die amount of loss it will have to indemnify in a given period of time than any one of the indi viduals is as to the amount of loss he would suffer during the same period if uninsured. The total amount of loss which the company experi ences increases as the number of risks it is car uying ,es hilt the proportion of the total loss %%Alia may be eonsidered as certain steadily increases and the proportion of uncertain loss diminishes. For the company the only uncer•
taints is as to how much the actual loss will differ from the average loss, and by the well known law of averages the percentage of waria tinu betWeell actual loss and average loss minishes as the number of cases increases. Now the insurance company under competitive con ditions makes its accumulations under the same conditions as the individual. To meet definite losses it accumulates only the amount of the losses; to meet uncertain losses it accumulates in the long run an amount in excess of the losses, and this excess varies with the degree of uncer tainty. It will be seen, therefore. that the com pany can carry the risks of a hundred thousand individuals on a much smaller accumulation than would be made by the individuals if each xvere carrying his own risk. This reduction in the cost of carrying risks is one of the economic advan tages of commerchil insurance.
The second advantage arises from the diffusion of loss. While it is true that for the entire group of persons engaged in a particular indus try accumulations to meet uncertain losses will exceed the amount of the losses, it is equally true that some will suffer loss in excess of their accumulations, while others will make the ac cumulations and escape the loss. In other words, while the group as a whole will make extra gains on account of the existence of risks, these gains will he unequally distributed among the members of the group. Those who suffer the loss will be seriously (Tippled financially if not actually ruined, while those who escape the loss will reap all the advantage. If, on the other hand, the members of the group are all insured, the sys tem of premiums and indemnities diffuses the losses actually suffered among all the members of the group. This causes such losses to fall on the least important part. of the capital of all instead of being concentrated on a few unfor tunate individuals. In this way the economic evils caused by the accidental destruction of property are greatly modified. From the social point of view, therefore, insurance may be defined as an economic institution for reducing the ac cumulation to meet uncertain losses and for lessening the evil consequences of the accidental destruction of property, through the combina tion of the risks of many individuals in one group. Aemimulation to meet uncertain losses and the transfer of risk are both involved, and in addition the combination of many risks in one group. It is this definition of the term that covers the business of insurance as it is carried on in the economic world.