CASES ON INSURANCE

I\TROI)UCTIO\

THE FUNCTION AND THEORY OF INSURANCE'

H EB\ER, S. S., LIFE INSURANCE (1926) PP. 10 TO 12.2

Although life insurance serves indirectly to increase the productivity of the community by eliminating worry and increasing initiative, its direct economic function is to change uncertainty into certainty and thus enable the insured to transfer the hazard of premature death to the insurer at the lowest possible cost. The real gain from life insurance is due to the combination of many separate risks into a group with a view to making possible the "substitution of certain for uncertain loss." * * * The larger the number of separate risks comprising a group, the less uncertainty will there be as to the amount of loss, and the less the uncertainty of loss the smaller will be the premium that the company needs to collect annually from the insured.

This function of insurance is perhaps most readily understood in connection with fire insurance. Thus let us assume that each of 5,000 persons owns a house valued at 810,000, that all the houses are alike, and that the annual loss by fire as regards the entire number, although varying slightly from year to year, averages one-half of 1 per cent. of the value, or .S50. In the absence of any system of insurance making possible the application of the law of average, it is clear that none of these owners can effect any arrangement which will place them in a position of absolute security. At best they can only anticipate their uncertain losses by practicing self-insurance, i.e. by increasing their rentals by an amount considerably in excess of the average annual loss of S.W. But even assuming that they can increase their rentals by four or five times

On the history of the various types of insurance see in Zartman & Price, Yale Readings on Marine and Fire Insurance (2d ed. 1913) the following: Huebner, S. S., History of Marine Insurance, Chap. I ; Bissell, R. M., History of Fire Insurance in Europe, Chap. III; Oviatt, F. C., History of Fire Insurance in the United States, Chap. IV; and in Zartman & Price, Yale Readings on Life and Accident Insurance (2d ed. 1913) the following: Walford, C., History of Life Insurance in Great Britain, Chap. V; Zartman, L. W., History of Life Insurance in the United States, Chap. VI; and see also Vance W. R., Law of Insurance (2d ed. 1930) Chap. I; Holdsworth, W. S., The Early History of the Contract of Insurance (1917) 17 Colum. L. Rev. 85: Vance W. R., The Early History of Insurance Law (1908) 8 Colum. L. Rev. 1; (reprinted) III Select Essays in Anglo-American Legal History 98.

2 Reprinted with the permission of the publishers, D. Appleton & Co.

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