• pooling of losses
• payment of fortuitous losses
• risk transfer
• indemnification

is the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss

**law of large numbers comes into play here and allows prediction of future losses 

**as additional individuals are added to the pooling arrangement, the standard deviation continues to decline while the expected value of the loss remains unchanged. 

one that is unforeseen and unexpected by the insured and occurs as a result of chance.

(the loss is accidental and occurs randomly)

ex:walking on an icy sidewalk and breaking a leg

a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured. 

ex of pure risks typically transferred:

risk of premature death, poor health, disability, destruction and theft of property, and personal liability lawsuits.

*private insurers typically insure only PURE risks. 

-some pure risks are not insurable

1. there must be a large number of exposure units
2. th loss must be accidental and unintentional
3. the loss must be determinable and measurable 
4. the loss should not be catastrophic
5. the chance of loss must be calculable
6. the premium must be economically feasible.

an arrangement by which the primary insurerer that initially writes the insurance transfers to another insurer (called the reinsurer) part or all of the potential losses associated with such insurance. 

**insurers can call avoid catastrophic losses by making the losses geographically dispersed. 

tendency of people with higher than average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwriting results in higher-than-expected losses.

ex: a high risk driver obtaining auto insurance at standard rates

refers to the process of selecting and classifying applicants for insurance. 

**adverse selection can be controlled by careful underwriting.

-applicants who meet the underwriting standards are insured at standard or preferred rates. 

-applicants can stil get coverage if they have a higher-than-average chance of loss but they will just have to pay higher premiums, or they will have limited coverage. 

programs are govt insurance programs with certain characteristics that distinguish them from other government insurance plans

ex: medicare

social security

workers compensation

1. indemnification for loss
2. reduction of worry and fear
3. source of investment finds
4. loss prevention
5. enhancement of credit

1. cost of doing business
2. fradulent claims
3. inflated claims