Insurance
Firms and individuals can be subject to risks which, in the aggregate, form a class of homogeneous cases. For example, out of a thousand firms, no one knows if a given firm will suffer a fire next year or not; but it is fairly well known that ten of them will. In that case, it may be of advantage for each of the firms to "take out insurance". They can pool their risks of loss, or a specialized firm, an "insurance company", can organize the pooling for them. Each firm will pay a certain premium, which will go into a pool to compensate those firms which suffer the fires.
And that is the principle of insurance.[1]
Case probability
Case probability means, that we know some of the factors which determine the outcome of a particular event; but there are other determining factors which we don't know. The cases are individual, unique, and nonrepeatable, their result is uncertain. If in roulette a ball falls ten times on red in succession, the probability, that in the next turn will be the result black, is not greater than it was before. Football games cannot be predicted on the results of last games, nor can be presidential elections.[2]
Instances of case probability are uninsurable.[1]
- Main article: Probability
Class probability
Class probability means, that we know nothing about an individual outcome, but we know everything about a whole class of events, and are certain about the future. In a lottery, for example, we know how many tickets are in total and how many will be drawn. But that does not say at all, if a particular ticket or tickets will win, and buying more tickets does not increase the chance of winning. An instance of class probability is called risk. It is possible to insure against risk, because the behavior of a class of events (or a reasonable subset of it) is well known.[3]
The field for the application of class probability is the field of the natural sciences, ruled by causality.[4]
- Main article: Probability
Risk and Insurance
Risk occurs when an event is a member of a class of a large number of homogeneous events and there is fairly certain knowledge of the frequency of occurrence of this class of events. For example, a firm producing bolts knows from long experience that, say, 1 percent of these bolts will be defective. It will not know whether any given bolt will be defective, but it will know the proportion of the total number. This knowledge can be converted into a definite cost of the firm’s operations, especially where enough cases occur within a firm. In other situations, a given loss or hazard may be large and infrequent in relation to a firm’s operations (such as the risk of fire), but over a large number of firms it could be considered as a "measurable" or actuarial risk. The firms can pool their risks, or a specialized firm - an insurance company - could organize the pooling for them.
Profit and loss are the results of entrepreneurial uncertainty. Actuarial risk is converted into a cost of business operation and is not responsible for profits or losses except in so far as the actuarial estimates are wrong.[1]
References
- ↑ 1.0 1.1 1.2 Murray N. Rothbard. "9. Risk, Uncertainty, and Insurance", Man, Economy and State online version, referenced 2009-12-04.
- ↑ Ludwig von Mises. "4. Case Probability", Human Action, online version, referenced 2009-10-10.
- ↑ Ludwig von Mises. "3. Class Probability", Human Action, online version, referenced 2009-10-10.
- ↑ Ludwig von Mises. "2. The Meaning of Probability", Human Action, online version, referenced 2009-12-04.
External links
- Wikipedia on insurance