Many of homogeneous exposure units. The sizable maturity of indemnity policies are provided for individual members of very large classes. Automobile assurance, for example, sheltered about 175 million automobiles in the United States in 2004. The being of many of homogeneous exposure units allows insurers to benefit from the so-called “law of large facts,” which in effect states that as the number of exposure units increases, the actual fallout are increasingly prone to become close to probable outcome. There are exceptions to this criterion. Lloyd's of London is legendary for insuring the life or strength of actors, actors and sports numbers. Satellite Launch mask covers trial that are infrequent. Large commercial chattels policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite fading on this criterion, many exposures like these are commonly considered to be insurable.
Definite Loss. The happening that gives levitate to the debit that is specialty to the insured, at slightest in principle, take place at a known time, in a known place, and from a known engender. The classic example collapse of an insured character on a life indemnity document. Fire, automobile accidents, and worker injuries may all simply meet this criterion. Other types of losses may only be known in idea. Occupational disease, for instance, may absorb prolonged exposure to damaging conditions where no stated time, place or reason is identifiable. Ideally, the time, place and produce of a death should be gained enough that a reasonable self, with sufficient information, could objectively verify all three basics.
Accidental Loss. The significance that constitutes the trigger of a statement should be fortuitous, or at least past the control of the beneficiary of the indemnity. The demise should be ‘real,’ in the sagacity that it results from an episode for which there is only the opportunity for price. Events that inhibit speculative rudiments, such as usual venture risks, are normally not considered insurable.
Large Loss. The quantity of the beating must be important from the perspective of the insured. Insurance premiums indigence to cover both the estimated detriment of losses, good the sacrifice of issuing and administering the rule, adjusting losses, and supplying the resources required reasonably to guarantee that the insurer will be able to pay claims. For small losses these final expenses may be many times the dimension of the prone charge of losses. There is little situation in paying such overheads save the protection vacant has real rate to a buyer.
Affordable Premium. If the likelihood of an insured result is so high, or the sacrifice of the incident so large, that the resultant premium is large virtual to the quantity of protection offered, it is not likely that somebody will buy assurance, even if on deal. Farther, as the accounting profession formally recognizes in financial accounting values, the premium cannot be so large that there is not a reasonable casual of a significant hurt to the insurer. If there is no such destiny of death, the transaction may have the form of cover, but not the substance. (See the U.S. Financial Accounting Standards Board emblem number 113)
Calculable Loss. There are two elements that must be at least worthy, if not formally calculable: the probability of hurt, and the attendant expense. Probability of failure is generally an empirical exercise, while beating has more to do with the ability of a reasonable being in possession of a replicate of the assurance document and a testimony of death associated with a maintain unfilled under that rule to make a reasonably definite and objective evaluation of the quantity of the deficit recoverable as a result of the profess.
Limiting peril of catastrophically large losses. The chief hazarded is regularly aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to gush policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers wish to maximum their exposure to a defeat from a separate event to some small portion of their money establish, comparable to 5 percent. Where the loss can be aggregated, or an individual document could produce exceptionally large claims, the funds constraint will confine an insurer's keenness for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to originate a new policy depends on the number and magnitude of the policies that it has already underwritten. Wind insurance in storm zones, particularly along coast shape, is another example of this phenomenon. In zealous luggage, the aggregation can move the intact industry, since the joint resources of insurers and reinsurers can be small compared to the wants of aptitude policyholders in areas exposed to aggregation peril. In commercial fire insurance it is workable to find lone properties whose total exposed merit is well in overkill of any individual insurer’s wealth constraint. Such properties are generally communal among several insurers, or are insured by a record insurer who syndicates the jeopardy into the reinsurance bazaar.