What Are The Basic Principles of Insurance? What I’m Learning Studying for My 2-15 Life, Health and Variable Annuity Insurance License
In this blog post, we’ll answer the question of what are the basic principles of insurance, which is very much correlated with the financial topics that I have written about in length previously on this blog. Basically, I am currently going for my 2-15 Insurance license, and I have been reading nothing but insurance history and regulations for the last few days, and have already learned a decent amount about some of the basics behind insurance, how it works, why it is a good product, and how it operates. In this blog post, I’m treating writing this article as kind of a refresh of some of the knowledge that I’ve learned so far, as well as a way for me to consolidate my education and add a new topic category to the website. And so, without further ado, here’s the answer to what are the basic principles of Insurance, and everything that I’ve learned for my Life, Health and Accident Insurance license so far. For more information, be sure to subscribe to our blog or to comment down below with your thoughts and opinions on the article, and we’ll get back to you within one business day with a response.
The main types of insurance products are as follows:
Benefits Insurance like Worker Health Care insurance and workers comp.
And a host of other types of insurance, read on or subscribe to our blog for additional details and information.
What are the Basic Principles of Insurance? The Foundations That Insurance is Built On?
The basic principles of insurance typically are based on transference or tolerance of risk. Allow me to explain, in the field of insurance, there is only one type of risk that can be insured, which is a pure risk, a risk that is zero sum, you can insure the possibility of a car accident because the risk is either you stay the same or you end up in an accident. You cannot insure a stock speculation, or you gambling at the casino (known as a speculative risk not a pure risk) because their is the possibility for gain, it is not a zero sum outcome, insurance can only secure certain types of pure risks also, based on the below factors (and also on risk pooling and the law of large numbers):
- Physical Hazards – Contrary to popular belief, these are not things like the car in the way of the accident, these are typically detriments to one’s physical health that create a hazard. Being blind or deaf is a physical hazard.
- Moral Hazards – Moral hazards are tendencies that people have, such as drinking too much or driving recklessly due to anger issues.
- Morale Hazards – Are similar to moral hazards, but more related to state of mind, like if someone just does not care and is very prone to reckless driving. This would be a Morale hazard in the field of insurance.
What are the Basic Principles of Insurance Sales, And What is the Most Profitable Type of Insurance to Sell?
Aside from the aforementioned qualities, there are some additional principles that insurance and the sale of these products tend to follow, these are the factors of Risk Pooling and the Law of Large Numbers:
- Risk Pooling – Risk pooling is the process by which risk can be spread out among a group of individuals. Suppose one individual would need to put up $10,000 in order to insure himself against collision in a car accident. This is a massive risk to one individual. However with an insurance policy, you can take 1000 people each contributing $10 to the fund, thus creating the same fund. Without the agreement to help provide for each others loss, each group member is on the hook for a full $10,000 fund, and would have to face the economic cost of disaster alone.
- The Law of Large Numbers – The Law of Large numbers is a very important factor in the world of insurance, in that the amount of people that are insured in a pool must be statistically measured. With the age, health and other factors of a group, in a group of 10 or 100, there is no reliable way to see how many may or may not get into say, a car accident from that time frame. However, it is possible to do this with a very strong degree of certainty with a pool of 10,000 or 100,000, which is how insurance companies manage risk and how the Law of Large Numbers comes into play.
Final Thoughts on The Basic Principles of Insurance, What They Are and How They Work
And so, that my friends, is the gist of what I know about insurance so far and on the basic principles of Insurance. Still have a very long ways to go here to become an insurance agent in both the fields of Life Insurance and Property and Casualty, but I think it is a work in progress! What did you think about the blog post and is there anyone in the insurance field that can add to this? If so, comment down below and be sure to subscribe to our blog for more info on all things finance!
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