The insurance transaction

Insurance is a risk sharing mechanism, so they compensate each other. This is what is called the principle of risk pooling.

However, for the whole system is not jeopardized, the risks embedded in mutuality must be:

• Homogeneous: it must meet a number of similar risks, which have the same chance of being realized and that will cause disbursement of the same order;
• Scattered: we must avoid grouping risks that are likely to occur at the same time and same place: in this case, the compensation could not take place. If you hail insures against all farmers in a region, any hailstorm can destroy the crops of all insured and catastrophic consequences for the insurer.
• Divided: should not be a disaster in itself could threaten mutuality.

The use of statistics and the calculation of the contribution

They are essential for insurance to determine the probability of risk. This probability is called the frequency. It is also possible to determine the average cost of a disaster.

From these elements, the insurer can then calculate the amortization payment, that is to say, the average rise needed to offset these risks.

The technical division of risks

When risk is too great for a mutual insurer (industrial, refineries ….), it uses two technical division of risks that can be implemented simultaneously: coinsurance and reinsurance.

Coinsurance is a proportional sharing the same risk between several insurers. Reinsurance is a transaction whereby an insurance company (the transferor) ensures itself with another company (the reinsurer or assignee) for a portion of the risks assumed.

Solvency rules

The regulations require insurance companies business rules very strict, guaranteeing insured that the insurer will still be able to meet its contractual commitments.
3 The contract (or policy) of insurance: the document that links insurer and insured 3

The insurance contract is based on mutual commitments that bind the insurance company and the insured and whose characteristics are detailed in the contract documents:

• general conditions are common to all insured guaranteed with the same insurance company for a specific type of contract (comprehensive home insurance, car insurance …). They explain the operation of the contract detailing all guarantees;
• special conditions personalize and adapt the contract guarantees the risk effectively covered.

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