Page 256 - DMGT303_BANKING_AND_INSURANCE

Unit 12: Insurance

3. Risk coverage starts from the date of accepting of proposal. Notes
4. Beneficiary nominee/legal heir stands to gain.
5. Policy can be assigned or mortgaged.

6. Policyholders can seek loans against the policy.
7. Certain policies cover up for treatment to serious ailments.

8. Ministry of Finance extends income-tax benefits on the amount of premiums paid.
9. Money can be set aside for children's marriage and education.
10. Provision for old age.

The Laws of Probability

The science of probabilities furnishes three principles of which practical use is made in life
insurance. They may be called respectively
1. The law of certainty,
2. the law of simple probability, and
3. the law of compound probability.

Their use makes possible the description of risk in terms of mathematical values, and the
statement of the three laws is as follows:
1. Certainty may be expressed by unity, or one;

2. Simple probability, or the probability or chance that an event will happen or that it will
not happen may be expressed by a fraction; and
3. Compound probability, or the chance that two mutually independent events will happen
is the product of the separate probabilities that the events, taken separately, will happen.

12.14 The Use of This Theory to Forecast Future Events

The value of these three laws of probability lies in the fact that they can be used to forecast future
events. Future events can be foretold in one of two ways:
1. by a priori or deductive reasoning, and
2. From knowledge of what has happened in the past under similar conditions.
The validity of a prior reasoning depends on the completeness with which all the causes at work
in the determination of any phenomenon are known; and the limitations of the human mind are
such that a priori reasoning does not furnish a safe basis upon which to develop a superstructure
guaranteeing that degree of certainty which is required in insurance. Reasoning inductively, or
on the assumption that what has happened in the past will happen again in the future if the same
conditions are present, does not require an analysis of the causes of phenomena in order to
predict future events. There lies behind this statement the assumption that all things are governed
by law. In the cases here used to illustrate the principles of probability this is the law of pure
chance. It is an even chance one with another that any marble may be drawn from the box or that
either side of the coin may be "up". Then if in a great number of trials it has been found that the
coin falls "heads up" one-half of the time the conclusion follows that this result will follow
approximately if the same number of trials is taken again.

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