Insurance

In concept a great idea. In practice, often a stupid one which creates risks, costs and bureaucracy where none would otherwise exist.

An insurance contract protects a person of limited resources from a remote but outsized risk. The theory is that by being a small part of a large class of people each of whom paying an affordable running premium, you are protected from colossal costs that may never happen. Thus you mutualise your risk of loss.

Example: In a group of 1000 people, each has a 1% chance of a £100,000 loss in a ten year period.

This means the likelihood is 10 people will each incur that whole loss, and 990 will suffer no loss.

This means that over the group, over that period, the total expected loss will be £1,000,000.

That cost, spread over the 100 people and ten years, works out at £100 per year each (£1,000,000 divided by 1000 divided by 10).

Factor in admin costs, the risk that the damage might be more than that and, of course, a healthy profit margin and call the insurance premium £200 per annum each.

Who would not pay £200 to be immunised against a £100,000 risk?

Right?

Well, hold on tiger.

See also

• Risk - Risk Article