INSURANCE. 678 INSURANCE. ences increases as the number of risks it is car- rying ini-ieascs; but tbe proportion of the total loss which may be considoreil as certain steadily increases and the proportion of uncertain loss diminishes. For the company the only uncer- tainty is as to how much the actual loss will diller from the average loss, and by the well- known law of averages the percentage of varia- tion between actual loss and average loss di- 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 amoinl of the losses; to meet uncertain losses it accumulates in the long run an amount in excess of the losses, and this exc-ess varies with the degree of uncer- tainty. It will be seen, therefore, that the com- pany can carry the risks of a hundred thousand individiuils on a much smaller accumulation than would be made by the individuals if each were carrying liis own risk. This reduction in the cost of carrying risks is one of the economic advan- tages of conunercial insurance. The second advantage arises from the diffusion of loss. Wliile it is true that for the entire group of persons engaged in a particular indus- try accumulations to meet uncertain losses will e.xeeed the amount of the los.ses, it is equally true that some will suffer loss in excess of their accumulations, while others will make the ac- ciiiiiuiations 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 be unequally distributed among the members of the group. Those who suffer the loss will be seriously crippled 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 les.sening the evil consequences of the accidental destruction of property, through the combina- tion of the risks of many individuals in one group. Accumulation 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. TiiE Relation of the IxnivrnuAL to Unceb- TAIXTY. If we turn now from the social aspects of insurance to consider it from the point of view of the insured person, we find that for him its chief characteristic is the substitution of cer- tainty for uncertainty, of a certain and definite expense for the possibility of an uncertain loss. Every person engaged in any form of industrial activity is exposed to many chances of accidental loss. Some forms of danger may be practically eliminated through the adoption of measures calculated to reduce the possibility of loss. Such measures may be grouped under the name prevention. It is to be noticed that the fact that it is possible to avoid the danger of loss in a particular case by the adoption of preventive measures docs not jirove that it is desirable to do so. .Such measures may cost more than they save. Preventive measures, therefore, will be ado])ted only so far as they are found to be economically advantageous. A person engaging in industrial activity finds himself exposed to the possibility of accidental losses from various sources and of various de- grees of uncertainty. To jirotect himself he may adopt any one of three methods. So far as it is economically advantageous, a prudent man will adopt i>reventive measures which will reduce the danger of loss and so lessen the degree of un- certainty. Against some of the remaining risks he may. from necessity or by choice, protect him- self by making accumulations to replace the capi- tal acciilentally destroyed, lie may then be said to be insuring himself, although the term self- insurance is more commonly restricted to such conduct with regard to risks against which it is possible to purchase protection from the insur- ance company. Where the transfer of risks to a company is impossible, as in the case of the danger of a shrinkage in the value of a stock of goods through a change in human wants, the method of self-insurance is the only one that can be adopted. Finally, with respect to a limited number of risks, protection may be secured by transferring them to insurance companies, and sil)stituting the obligation to make fixed and definite jiayments to the company for the neces- sity of making individual accumulations. The choice between these three methods of preparing to meet uncertain accidental loss<'s will be made by a jiriulent person on the basis of their relative cost. Where insurance in an established com- pany is possible, the choice of self-insurance would never be justifiable, if tbe cost of insur- ance in the company were as low as it could be made with entire safety. It is only because in- surance companies fail to reduce premiums to the cost level that many large business concerns find it advantageous to carry their own risks.
large concern with many detached risks can
do it where a small concern cannot, but under ideal conditions it would not be a profitable proceeding even for the former. COM.MERCIAL INSURANCE. Commercial insurance comes under tfle last of the three definitions given at the head of this ar- ticle. It is an economic institution for dealing with uncertain losses. The study of it may be conveniently made under three heads t The rela- tion between the insured and the company, in- cluding an examination of the nature of the insurance contract; the kinds of insurance com- panies and their characteristics, including their methods of operation : the relation of the fiovern- ment to insurance, including a discussion of what it ought to l)e, as well as what it is. A. The Relation Between the TysfRED AND THE Insurance Company. The Risk. — An insurance contract transfers a liability to uncer- tain loss of a more or less narrowly defined nature from the person insured to the insurance com- pany. For the insured it is the substitution of a definite payment or series of payments for the possibility of an uncertain loss; for the company, conversely, it is the acceptance of an uncertain liability in exchange for a definite payment or
