The economic essence of insurance
The role of insurance in a market economy is described by the following basic concepts: risk, protection service against it and the cost of this service.
Risk inevitably accompanies any purposeful activity and is expressed in random deviations of its results from the expected. The nature of the risk is ambiguous: the risk can give additional benefits in a favorable combination of circumstances, but can lead to additional losses.
At the heart of insurance is the concept of risk as a possible, accidental event leading to loss or damage. With regard to insurance risk define in the most general form as a possible occurrence of events leading to losses. The randomness of the results of the manifestation of risk is caused by the impact of previously unknown and variable factors of the external environment, the incompleteness of our knowledge of future activity and its conditions during the planning period of activity and the mistakes made (for details, see Chapter 3).
Insurance is protection, but not from all unfavorable events, but only from random events that could occur with a certain, previously estimated probability, and of which it is impossible to know in advance and exactly where, when and with whom they can occur. Such events can be a hurricane that destroyed homes in its path, a fire in the house, an accident on the road. The possibility that such events will occur is called risk.
A person who owns a house and a car knows that such an unfavorable confluence of circumstances is possible that will lead to a fire or an accident, but it is possible that such a combination of circumstances will not happen to him during the forecast period.
• A random event is a supposed event that can happen (happen, occur) in the limited time period in question, or it may not happen. If an accidental event does happen, it happens, it is called a case. Probability is a numerical measure of the evaluation of the objective possibility of an accidental event.
The task of the insurers to assign such a payment for the risks accepted for insurance so that the collected money is enough for payments to those insured who have had adverse events - insurance cases , on their own expenses for conducting insurance operations and making profit. Such insurance is called commercial. But in mutual insurance societies working on a non-profit basis, profits are not generated, and the balance of funds after insurance payments is sent to the reserve fund or to discounts on tariffs in the next insurance period. Non-profit is also state social insurance, which provides payments to citizens in case of temporary or permanent disability (pension and social insurance) and payment of medical assistance (medical or hospital insurance). Insurance contributions in state social insurance are paid by employers and (or) the budget.
Insurance relations in the economy refer to the third stage of reproduction, on which a redistribution of material wealth occurs. The insurer does not produce material goods. It only creates a specific financial service for insurance protection, but it only realizes it after receiving insurance premiums from customers. Separate phases of the provision of services (payment - receiving services) in insurance are far apart from each other in time. Having paid the insurance premium, the policyholder can receive compensation for damage after a very long period of time, and may not receive any compensation for damage or an insurance premium paid if the insured event has not occurred in the contract period.
Therefore, insurance relations, being a part of financial relations, have exceptional specificity.
First, insurance deals only with adverse random and probable events, such that may happen and cause losses, or may not happen.
Secondly, all types of commercial relations, except insurance, are based on the principles of strict, individual equivalence for each transaction and the obligation to transfer goods or services for money to the buyer. Insurance relations do not provide for strict individual equivalence according to the law and the terms of the contract. There is no such equivalence if the client receives insurance compensation. So, for example, the paid insurance premium can be hundredths of a percent of the insured amount that the policyholder will receive upon the occurrence of the insured event. This feature of insurance relations has a legal basis, enshrined in the US Civil Code.
In contrast to the system, in principle, nonequivalent economic relations, for example tax, when all taxes are paid, and not all payers receive the budget, insurance relations are in principle equivalent.
This equivalence is that the cumulative part of insurance premiums, intended exclusively for insurance payment (net premium), should correspond to the expected value of the damage as much as possible. In this way, the recoverability of the insurance fund is achieved for a certain period of time during which the insurance tariffs (the tariff period), the set of policyholders on the scale of which the premiums were assessed, are in effect. Such specific equivalence of insurance relations has a strict mathematical basis, reflecting the objective nature of insured risks.
Thirdly, insurance economic relations are characterized by closeness and solidarity. Closedness of these relations is that not all citizens enter and receive compensation, but only those who have concluded an insurance contract with the insurer, paid it with insurance premiums, and with whom the insurance event provided by the insurance contract occurred. Closure of commercial and mutual insurance relations, in comparison with state social insurance, is more strict.
Thus, commercial and mutual insurance relations are based on the principle of collective economic equivalence, which consists in the fact that the net premium retained in insurance reserves should correspond to the expected value of the total loss on insured events. Commercial and reciprocal insurance relations are characterized by closedness: not all of them enter and receive reimbursement, but only those who have concluded an insurance contract with the insurer, paid it with insurance premiums and with whom the insurance event provided by the insurance contract occurred. By this correspondence, the funds of the insurance fund are returned to its participants - the insured for the tariff period. The economic equivalence of insurance relations is based on a quantitative risk assessment and the calculation of an adequate insurance service price, reflecting the objective nature of the insured risks.
• In view of these specific differences, the economic essence of commercial and mutual insurance is expressed in economic relations in transferring the insurer's risk to the insurer in exchange for payment by the insured of a premium having a civil law form and characterized by chance and probability; statistical observability and the possibility of mathematical calculation of the consequences of risk; closed layout of losses and damages (in favor of the affected insured at the expense of all insured of this insurance fund); the presence of temporal and spatial boundaries of the layout of the damage.
In social insurance, collective economic equivalence due to the imposition of damage not on all persons at risk, but only on solvent ones, may not be provided, while the deficit of funds in insurance funds is covered from the budget. Therefore, social insurance in most countries is based on the principle of solidarity: the young pays premiums for the elderly, healthy - for the patient.
These features of insurance relations lead insurance to a separate branch of knowledge. Obviously, within the framework of only one economic, legal or mathematical theory it is impossible to adequately describe all aspects of the insurance process, here it is necessary to synthesize the theoretical positions of several sciences. To do this, you can use the theory of social utility, developed by Nobel laureate A. Sen. In his works, the economic theory of welfare began to gradually transform into the theory of public choice, within which a positive analysis of how different public preferences are formed and implemented. A. Sen, combining mathematical models with ethical and philosophical concepts, proved that for the well-being of man, it is not the overall dimensions of the goods produced by society that are important, but the availability of these benefits for each individual person. And this statement can be fully attributed to the insurance industry. Insurance is basically a collective way of protecting against accidental dangers and is closely related to the sociomics - the system of maintaining, developing and controlling social security, public welfare and the quality of life of the population, the accessibility of public goods.
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