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%0D%0A%09%09%09%3Ch1%3EInsurance%3C%2Fh1%3E%0D%0A%09%09%09%3Cp%3EInsurance%2C%20in%20law%20and%20economics%2C%20is%20a%20form%20of%20risk%20management%20primarily%20used%20to%20hedge%20against%20the%20risk%20of%20catastrophic%20financial%20loss.%20Insurance%20is%20defined%20as%20the%20equitable%20transfer%20of%20the%20risk%20of%20a%20potential%20loss%2C%20from%20one%20entity%20to%20another%2C%20in%20exchange%20for%20a%20premium%20and%20duty%20of%20care.%3C%2Fp%3E%0D%0A%09%09%09%3Ch2%3EPrinciples%20of%20insurance%3C%2Fh2%3E%0D%0A%09%09%09%3Cp%3EFrom%20the%20point%20of%20view%20of%20the%20insurance%20company%20there%20are%20four%20general%20criteria%20for%20deciding%20whether%20to%20insure%20events%20or%20not.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3E1.%20There%20must%20be%20a%20larger%20number%20of%20similar%20objects%20so%20the%20financial%20outcome%20of%20insuring%20the%20pool%20of%20exposures%20is%20predictable.%20Therefore%20they%20can%20calculate%20a%20fair%20premium.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3E2.%20The%20losses%20have%20to%20be%20accidental%20and%20unintentional%20from%20the%20point%20of%20view%20of%20the%20insured.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3E3.%20The%20losses%20must%20be%20measurable%2C%20identifiable%20in%20location%2C%20time%2C%20and%20be%20definite.%20They%20also%20want%20the%20losses%20to%20cause%20economic%20hardship.%20That%20is%2C%20so%20the%20insured%20has%20an%20incentive%20to%20protect%20and%20preserve%20the%20property%20to%20minimize%20the%20probability%20that%20the%20losses%20occur.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3E4.%20The%20loss%20potential%20to%20the%20insurer%20must%20be%20non-catastrophic.%20It%20cannot%20put%20the%20insurance%20company%20in%20financial%20jeopardy.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3ELosses%20must%20be%20uncertain.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3EThe%20rate%20and%20distribution%20of%20losses%20must%20be%20predictable%3A%20To%20set%20premiums%20%28prices%29%20insurers%20must%20be%20able%20to%20estimate%20them%20accurately.%20This%20is%20done%20using%20the%20Law%20of%20Large%20Numbers%20which%20states%20that%3A%20The%20larger%20the%20number%20of%20homogenous%20exposures%20considered%2C%20the%20more%20closely%20the%20losses%20reported%20will%20equal%20the%20underlying%20probability%20of%20loss.%20If%20the%20coverage%20is%20unique%2C%20the%20insured%20will%20pay%20a%20correspondingly%20higher%20premium.%20Lloyd%27s%20of%20London%20often%20accepts%20unique%20coverages.%20%28e.g.%2C%20the%20insuring%20of%20Tina%20Turner%27s%20legs%20and%20Jennifer%20Lopez%27s%20buttocks%29%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3EThe%20loss%20must%20be%20significant%3A%20The%20legal%20principle%20of%20De%20minimis%20dictates%20that%20trivial%20matters%20are%20not%20covered.%20Furthermore%2C%20rational%20insurance%20uses%20existing%20insurance%20when%20the%20transaction%20costs%20dictate%20that%20filing%20a%20claim%20is%20not%20rational.%20Actually%2C%20De%20minimis%20does%20not%20come%20into%20play%20here.%20The%20reality%20is%20that%20it%20costs%20too%20much%20to%20insure%20frequent%20and%2For%20small%20losses.%20It%20is%20much%20more%20cost%20effective%20to%20not%20transfer%20small%20loss%20potential%20to%20insurance%20companies%20by%20taking%20the%20largest%20deductible%20that%20you%20can%20stand%20%28given%20adequate%20price%20reduction%29.%20As%20for%20filing%20small%20claims%2C%20if%20the%20insurance%20company%20contractually%20should%20pay%20for%20it%2C%20you%20should%20file%20it.%20This%20is%20the%20difference%20between%20deciding%20before%20the%20contract%20the%20parameters%20and%20after%20following%20through.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3EThe%20loss%20must%20not%20be%20catastrophic%3A%20If%20the%20insurer%20is%20insolvent%2C%20it%20will%20be%20unable%20to%20pay%20the%20insured.%20In%20the%20United%20States%2C%20there%20is%20a%20system%20of%20Guarantee%20Funds%20that%20run%20at%20the%20state%20level%20to%20reimburse%20insured%20people%20whose%20insurance%20companies%20have%20become%20insolvent.%20%5B1%5D%20This%20program%20is%20run%20by%20the%20National%20Association%20of%20Insurance%20Commissioners%20%28NAIC%29.%20%5B2%5D%20In%20the%20United%20Kingdom%2C%20the%20Financial%20Services%20Authority%20%28FSA%29%2C%20which%20regulates%20all%20insurance%20companies%2C%20has%20its%20own%20standards%20of%20solvency%20which%20must%2C%20by%20law%2C%20be%20adhered%20to.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3ETo%20avoid%20catastrophic%20depletion%20of%20their%20own%20capital%2C%20insurers%20almost%20universally%20purchase%20reinsurance%20to%20protect%20them%20against%20excessively%20large%20accumulations%20of%20risk%20in%20a%20single%20area%2C%20and%20to%20protect%20them%20against%20large-scale%20catastrophes.%3C%2Fp%3E%0D%0A%09%09%09%3Cp%3EAdditionally%2C%20speculative%20risks%20like%20those%20incurred%20through%20gambling%20or%20through%20the%20purchase%20of%20company%20stocks%20are%20uninsurable.%20Insurable%20risks%20should%20have%20accidental%20and%20not%20intentional%20losses%2C%20and%20they%20should%20have%20economical%20feasible%20premiums%2C%20meaning%20that%20chance%20of%20loss%20must%20not%20be%20too%20high.%3C%2Fp%3E%0D%0A%09%09%09