Insurance have been able to keep their promise because life insurance is based on sound scientific principles. These include
1) Shared risk: Members of our earliest societies understood the benefits of pooling their resources talent and also risk . Whether hunting for food or defending against common enemies people found that sharing the risk among the group minimized the risk to the individual. This is how the workers guilds of the middle ages attempted to protect families of members against another common enemy: financial hardship caused by death. Members would contribute small amounts each years into a common widows and orphans fund. Though the system was flawed it did provide basic protection for families of members who died during the year. This idea was still used as late as the Nineteenth Century in this country by immigrant groups: it later became the basis for the hundreds of fraternal life insurance companies still flourishing today as well as for association group insurance plan including those offered by the American Academy of family physicians.
2) The La of the large numbers: The principles of shared risk only works when the law of large numbers is also applied, Under this scientific principles the larger the group, the less impact the death of one member has on the group as a whole. A group with just ten, a hundred even a thousands members would not works. The base would be too fragile to susceptible to mortality blips due to situations and events that lead to unexpected deaths such as a flu epidemic or earthquake that look of thousands of lives in a certain geography location. This is one reason groups and individual today transfer the risk to insurance companies in effect forming new groups consisting of hundreds of thousands very often millions of members.
3) Predictable Mortality: A third principle of life insurance is predictable mortality. It is not possible to tell when a given individual will die. but du to more than a century of tracking and recording data about health life style and mortality trends, insures can projects life expectancies. This data is recorded in mortality tables. A mortality table is a chart summarizing the life span of a large number of people. Specifically it projects (a) the number of death that will occur per 1,000 individual at a given age and (b) the life expectancy of an individual at any age. The 1980 commissioner�s standard ordinary mortality table 1980 (SO) is the official mortality table in use the by all insurances today, It charts a representative sample of 10 million lives and follows them to age 100 when for insurance purpose the last person is presumed to have died. Once the insurance company can reasonably predict how many people of a given age will die in a given year, it can project mortality experience. Subsequently the insurer can then project costs and premium rates. For instances as life expectancy has climbed dramatically in this century the cost of life insurance has decreased.
4) Invested Assets: When the insurance company receives premium, that money is not just put into a vault. It is invested. It may be years before a claim is made against the police. So, the impact of investment experience can be significant. The projected return is factored into premium and other costs. At the same time a percentage of assets is set aside in company reserves to reduce the impact of unexpected events.
5) Fair and accurate risk selection: A life insurance contract is an aleatory contract. It is based on the possibility of a chance occurrence and in all likelihood, one side will benefit more than the other. However for life insurance to work, the insurer needs to recover as many variables as possible. This brings up to the final principle of insurance, which is fair and accurate risk assessment. Especially with the individual insurance policies, coverage is issued based on the assumption of reasonable risk. This means insuring people who are generally in good health at the time of application. This is also why medical exams and blood samples are sometimes required. Once insured policy owners are protected if they become ill. That is the reasonable risk the company assumes that a certain percentage of insured will die prematurely. However were the company to issue policies on seriously ill application life insurance would becomes prohibitively expensive.
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