Basic Elements of law of probability or law of large numbers insurance

The theory of probability (also known as probability theory or theoretical probability) is a statistical method used to predict the likelihood of a future outcome. This method is used by insurance companies as a basis for crafting a policy or arriving at a premium rate.

- R. Venkatesan

Part.II

Applicability of probability in insurance: 

Principles of Insurance: 

The insurance is based upon (i) Principles of Co-operation and, (ii) Principles of Probability.

> Principles of Co-operation:

Insurance is a co-operation device. If one person is providing for his own losses, it cannot be strictly insurance because in insurance, the loss is shared by a group of persons who are willing to co-operate. In ancient period, the persons of a group were willingly sharing the loss to a member of the group. They used to share the loss to a member of the group.

They used to share the loss at the time of damage. They collected enough funds from the society and paid to the dependents of the deceased or the persons suffering property losses.

The mutual co-operation was prevailing from the very beginning up to the era of Christ in most of the countries. Lately, the co-operation took another form where it was agreed between the individual and the society to pay a certain sum in advance to be a member of the society.

The society by accumulating the funds, guarantees payment of certain amount at the time of loss to any member of the society. The accumulation of funds and charging of the share from the member in advance became the job of one institution called insurer.

Now it has become the duty and responsibility of the insurer to obtain adequate funds from the members of the society to pay them at the happening of the insured risk. Thus, the shares of loss took the form of premium. Today, all the insured give a premium to join the scheme of insurance. Thus, the insured are co-operating to share the loss of an individual by payment of a premium in advance.

> Principles and Theory of Probability: