THE PRINCIPLES OF INSURANCE

The principle upon which insurance is based is “the pooling of risks.”If the incidence of some particular risk can be calculated from past experience its probability can be calculated. If, for example, over a long period of time fire has destroyed business premises to the value of an average of RM 50 millions a year such premises can be insured against fire if the combined payments collected from people insuring against this risk total RM 50 millions plus the insurance company’s expenses in conducting the business. Thus, what happens is that each person insuring against a particular risk pays a relatively small contribution to a common fund or pool, from which compensation can be paid to those who suffer in that way. The same result would be achieved if a large group of businessmen made an agreement to share any loss due to fire (or due to any other specified cause) among themselves. It is obviously more satisfactory to allow an independent body like an insurance company to undertake the business.

Insurance, therefore, can be effected only against those risks the probability of which can be mathematically calculated. It must be stressed that the insurance company itself is not taking any risk of loss, for, by spreading the risk over as wide a field as possible, the compensation it is called upon to pay should be well covered by the premiums it collects. Most Malaysian insurance companies have now been in existence long enough to have built up large reserves which protect them against any abnormal demands which might be made upon them. If, however, insurance companies find that are having to pay out more in premiums for a particular risk, they will clearly have to increase their premiums. An insurance company will keep a separate fund for each branch of insurance it undertakes.