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3. The Loss Must be Significant:
The losses which would cause financial hardship to most people are considered to be insurable.
4. The Loss Rate Must be Predictable:
To predict the loss rate for a given group of insureds, the insurer must predict the number and
timing of covered losses that will occur in that group of insureds, and so that it can determine
the proper premium amount to charge the owner of each policy.
An important concept that helps assure us of the accuracy of the predictions about the
probability of an event occurring is the law of large numbers.
Mortality tables that indicate with great accuracy the number of people in a large group who are
likely to die at each age.
Morbidity tables which display the rates of morbidity, or incidence of sickness and accidents, by
age, occurring among a given group of people.
5. The Loss Must Not Be Catastrophic to the Insurer:
A potential loss is not considered insurable if a single occurrence is likely to cause or contribute
to catastrophic financial damage to the insurer.
To prevent the possibility of catastrophic loss and ensure that losses occur independently of
each other, insurers spread the risks they choose to insure.
Reinsurance is insurance that one insurance company known as ceding company, purchases from
another insurance company known as reinsurer, in order to transfer risk on insurance policies
that the ceding company issued.
To cede insurance business is to obtain reinsurance on that business by transferring all or part
of the risk to a reinsurer.
A life insurance company typically sets a maximum amount of insurance known as its retention
limit that the insurer is willing to carry at its own risk on any one life without transferring some
of the risk to a reinsurer.`
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