What is insurance really?

The Commission on Insurance Terminology of the American Risk and Insurance Association has defined insurance as follows:

"Insurance is the pooling of fortutious losses by transfer of such risks to insurers, who agree to indemnify insured for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk."

An important to note is insurance company functions as a commercial organisation that seeks to maximise profits by increasing revenue and controlling losses. Thus, an insurance company with a higher than expected loss ratio will probably raise their rates eventually in order to meet their bottom line.

The question is, who will bear the rates revision? The obvious candidates are those who have contributed to the higher loss ratio. But wait, how about the common folks, the majority of it, who have simply paid for the premium without any claims? So, if we go back to the definition and concept of insurance earlier, the answer becomes clearer. Most of the time, depending on the type of insurance and how the insurer runs the business, the rates for them will go up as well. The consolation i can offer is they should experience a softer impact of the rates revision.

End of the day, no individual has to bear the risk of loss himself, which is the aim of insurance.