Insurance have been able to keep their promise
because life insurance is based on sound scientific principles. These include
1) Shared risk: Members of our earliest societies understood the
benefits of pooling their resources talent and also risk .
Whether hunting for food or
defending against common enemies people found that sharing the risk among the
group minimized the risk to the individual. This is how the workers guilds of the middle ages attempted to protect families of members against another common enemy: financial
hardship caused by death. Members would
contribute small amounts each years into a common widows and orphans fund. Though
the system was flawed it did provide basic protection for families of members who died during the year. This
idea was still used as late as the Nineteenth Century in this country by immigrant groups: it later
became the basis for the hundreds of fraternal
life insurance companies still
flourishing today as well as for association group insurance plan
including those offered by the American
Academy of family physicians.
2) The La
of the large numbers: The principles of shared risk only works when the law of
large numbers is also applied, Under this scientific principles the larger the group, the less
impact the death of one member has on the group as a whole. A group with just
ten, a hundred even a thousands members would not works. The base would be too fragile to susceptible
to mortality blips due to situations and events that lead to
unexpected deaths such as a flu epidemic
or earthquake that look of thousands of lives in a certain geography location. This is one reason groups and
individual today transfer the risk to insurance companies in effect forming new
groups consisting of hundreds of
thousands very often millions of
members.
3) Predictable Mortality: A third principle
of life insurance is predictable mortality. It is not possible
to tell when a given individual will die. but du to more than a century of
tracking and recording data about health life style and mortality trends,
insures can projects life expectancies. This data is recorded in mortality tables. A mortality
table is a chart summarizing the life span of a large number of people.
Specifically it projects (a) the number of death that will occur per 1,000
individual at a given age and (b) the life expectancy of an individual at
any age. The 1980 commissioner’s standard ordinary mortality table 1980 (SO) is
the official mortality table in use the by all insurances today, It charts a
representative sample of 10 million lives and
follows them to age 100 when for insurance purpose the last person is
presumed to have died. Once the insurance company can reasonably predict how many people of a given age will
die in a given year, it can project mortality experience. Subsequently the
insurer can then project costs and premium
rates. For instances as life
expectancy has climbed dramatically in this century the cost of life insurance has decreased.
4)
Invested Assets: When the insurance company receives premium, that money
is not just put into a vault. It is
invested. It may be years before a claim is made against the police. So, the
impact of investment experience can be significant. The projected return is
factored into premium and other costs. At the same time a percentage of assets
is set aside in company reserves to
reduce the impact of unexpected events.
5) Fair and accurate risk selection: A
life insurance contract is an
aleatory contract. It is based on the
possibility of a chance occurrence and
in all likelihood, one side will benefit more than the other. However for
life insurance to work, the
insurer needs to recover as many variables as possible. This brings up to the final principle of insurance, which is fair and accurate risk
assessment. Especially with the
individual insurance policies, coverage is issued based on the assumption of
reasonable risk. This means insuring people who are generally in good health at the time of application. This
is also why medical exams and blood
samples are sometimes required. Once
insured policy owners are protected if they become ill. That is the
reasonable risk the company assumes that
a certain percentage of insured will die prematurely. However were the company to issue policies on
seriously ill application life
insurance would becomes
prohibitively expensive.