Federal Deposit Insurance Corporations insures deposits of U.S. commercial banks which meet its regulations; the coverage provides up to $100,000 per depositor. Roughly 98 percent of all U.S. banks are insured, and approximately 62 percent of all commercial bank deposits are covered by the FDIC's insurance program. Each participating bank is assessed annually an amount equal to about 1\10 of 1 percent of its eligible deposits to build and maintain a national insurance fund.
One of the most important functions of the FDIC is to act as a check on the state banking commissions, because few banks today-even those with state charters-will open their doors without FDIC insurance. The FDIC reviews the adequacy of capital, earnings prospects, the character of management, and the public convenience and needs aspects of each application before granting deposit insurance. This agency is also charged with examining insured banks that are not members of the Federal Reserve System, and it must approve applications for branches, changes in location, or mergers involving federally insured banks. The FDIC is empowered to close a bank will be merged with or absorbed by a healthy one; FDIC often purchases some of the bankrupt institution's weaker assets to support such a merger.
Showing posts with label Insurance. Show all posts
Showing posts with label Insurance. Show all posts
Sunday, September 27, 2009
Saturday, September 26, 2009
The roles played by life insurance companies in the mortgage market
Life insurance companies make substantial investments in commercial as well as residential mortgage properties. Commercial mortgages make up more than 60 percent of mortgage obligations held by life insurance companies, with residential units accounting for between a third and a quarter of their mortgage total. These companies will search national and international markets for good mortgage investments instead of focusing upon only one or a few local areas.
In the past, life companies strongly preferred government-guaranteed mortgages. In recent years, however, the higher yields available on conventional mortgages have caused some shift of emphasis toward these more risky loans. Despite the greater flexibility of conventional home mortgages, life insurance companies have been gradually reducing their holdings of home mortgages and emphasizing commercial and apartment mortgages. Commercial and apartment loans often carry "equity kickers," which permit the lender to receive a portion of project earnings as well as a guaranteed interest rate.
At the end of 1980 life insurance companies held about 9 percent of total mortgages loans outstanding in the United States. This market share placed them third among private mortgage lenders, behind savings and loan associations and commercial banks. This high ranking is due in part to the fact that life insurers are the largest institutional holder of farm mortgages; stand second only to commercial banks in mortgage loans for commercial properties, and rank second to savings and loans in apartment loans. However, in making loans to finance one-to-four-family residential dwellings, life companies rank a distant fourth among all private lenders. For example, at year-end 1980 they held only $18 billion in one-to-four-family residential loans, compared to $65 billion for mutual savings banks, more than $160 billion reported by commercial banks, and nearly $420 billion held savings and loan associations.
In the past, life companies strongly preferred government-guaranteed mortgages. In recent years, however, the higher yields available on conventional mortgages have caused some shift of emphasis toward these more risky loans. Despite the greater flexibility of conventional home mortgages, life insurance companies have been gradually reducing their holdings of home mortgages and emphasizing commercial and apartment mortgages. Commercial and apartment loans often carry "equity kickers," which permit the lender to receive a portion of project earnings as well as a guaranteed interest rate.
At the end of 1980 life insurance companies held about 9 percent of total mortgages loans outstanding in the United States. This market share placed them third among private mortgage lenders, behind savings and loan associations and commercial banks. This high ranking is due in part to the fact that life insurers are the largest institutional holder of farm mortgages; stand second only to commercial banks in mortgage loans for commercial properties, and rank second to savings and loans in apartment loans. However, in making loans to finance one-to-four-family residential dwellings, life companies rank a distant fourth among all private lenders. For example, at year-end 1980 they held only $18 billion in one-to-four-family residential loans, compared to $65 billion for mutual savings banks, more than $160 billion reported by commercial banks, and nearly $420 billion held savings and loan associations.
Friday, August 7, 2009
structural weknesses in federal deposit insurance
as we indicated in our review of the history of federal deposit insurance, congress recognized the need for a large regulatory structure to deal with the moral hazard problem that stems from deposit insurance. Despite its best efforts, however, Congress created a deposit insurance system with two key structural weaknesses. First, the present system has proved to be poorly equipped to adapt itself to efforts of depository institutions- whether intentional or unintentional-to increase the risks they incur. second, the system has entrusted significant power to regulators without safeguards against the risk that regulators themselves may make bad adjustments.
Thursday, August 6, 2009
analysis of deposit insurance
in this post we critically examine deposit insurance. We first analyze the underlying problems that motivate a potential need for deposit insurance: asset illiquidity and lack of information concerning the financial condition of households and firms. Then we describe the benefits to society of deposit insurance-and the problem for the deposit insurer.
The Heart of the depository institution problem Depository institution accept deposits that are extremely liquid;that is,no demand, the institution must be prepared to refund, at a one-to-one exchange rate, amounts held in demand deposit and other checkable deposit accounts. the assets that depository institutions acquire are much less liquid. this situation exposes depository institutions to runs, a situation in which many depositors want their funds at the same time and depository institutions are unable to pay them all. because depository institutions expose themselves to such liquidity risks, it is proper to ask why they do so. the answer is that, traditionally, the very nature of the function of depository institutions is to assume this liquidity risk from households and firms-for a fee, of course.
In other words, the ultimate source of the liquidity problem stems from households and firms. Consider a setting in which:
1. households and firms experience liquidity risks.
2. Lacks of information exists concerning the liquidity risk exposure of specific households and firms.
3. Because of item 2, the liquidity risks are uninsurable; that is, no private insurance will emerge because, given imperfect information, insurance may well set deposit insurance premiums in such a way as to induce many households and firms to take liquidity risks.
In such a system, households and firms will undertake less long-term, illiquid investment projects than they otherwise bear excessive, uninsurable, risks Here is where depository institutions emerge. They offer deposit contracts that are convertible into currency at a one-to-one exchange upon demand; they thereby substitute their own liquidity risk for non-financial firms "liquidity risk, and they do so with the hope of earnings profits. While this arrangement leaves everyone better off and promotes economic growth, it also has its disadvantages: Occasionally bank runs arise and depository institutions fail-bringing households and firms down with them
the benefits to society of deposit insurance we have established the fact that by accepting such highly liquid liabilities as demand deposit and savings accounts, banks and thrifts have gone into the businesses of substituting their own liquidity risk for the liquidity risk of households and firms, in an attempt to earn profits. But this now merely transfers the inherent problem concerning a lack of information about financial strength from individuals and businesses to depository institution. Individual depositors have imperfect information concerning (1) how risky and how liquid the depository institution is asset portfolio is and (2) when, and how much, other depositors wish to withdraw. Furthermore, depository institutions typically employ a "first-come, first-served" rule in honoring deposit redemption.
Because depositors Know that not all depositors can get their funds back, one ‘s place in line matters and runs are possible. Note that runs are quite rational from the individual depositor‘s point of view. But there are social costs to runs: Runs on insolvent depository institutions may lead to runs on solvent institution; and if many banking institutions fail, the total quantity of credit-and of money, because demand and other checkable deposits are part of the quantity of money-will fall dramatically. As a result, the flow of economic activity-national income, national output, and employment-can be adversely affected. enter the federal deposit insurance scheme.
Now the insurer Has the problem Note, however, that the problem concerning lack of information about specific enterprise remains. the Federal deposit insurer must now be concerned with the solvency of those institutions that it is insuring. the insurer, therefore, incurs the costs of gathering and evaluating information about the condition of depository institutions; those costs exist whether or not a specific institution fails. if an institution does fail, the federal deposit insurer incurs the additional expense of paying the claims of the insured depositors.
If the deposit insurer does not price its services properly, then depository institutions have an incentive to increase their profits by taking on additional risk. but in practice it is extremely difficult for even the federal deposit insurer to measure the risk of insured banks. Presumably the risk of an insured bank to the federal deposit insurer is indicated by the variation in the bank‘s future net income stream; but one cannot directly observe today the future results of specific bank management decision. in practice, deposit insurers measure a bank ‘s risk by the degree of variability in its past earnings.
The Heart of the depository institution problem Depository institution accept deposits that are extremely liquid;that is,no demand, the institution must be prepared to refund, at a one-to-one exchange rate, amounts held in demand deposit and other checkable deposit accounts. the assets that depository institutions acquire are much less liquid. this situation exposes depository institutions to runs, a situation in which many depositors want their funds at the same time and depository institutions are unable to pay them all. because depository institutions expose themselves to such liquidity risks, it is proper to ask why they do so. the answer is that, traditionally, the very nature of the function of depository institutions is to assume this liquidity risk from households and firms-for a fee, of course.
In other words, the ultimate source of the liquidity problem stems from households and firms. Consider a setting in which:
1. households and firms experience liquidity risks.
2. Lacks of information exists concerning the liquidity risk exposure of specific households and firms.
3. Because of item 2, the liquidity risks are uninsurable; that is, no private insurance will emerge because, given imperfect information, insurance may well set deposit insurance premiums in such a way as to induce many households and firms to take liquidity risks.
In such a system, households and firms will undertake less long-term, illiquid investment projects than they otherwise bear excessive, uninsurable, risks Here is where depository institutions emerge. They offer deposit contracts that are convertible into currency at a one-to-one exchange upon demand; they thereby substitute their own liquidity risk for non-financial firms "liquidity risk, and they do so with the hope of earnings profits. While this arrangement leaves everyone better off and promotes economic growth, it also has its disadvantages: Occasionally bank runs arise and depository institutions fail-bringing households and firms down with them
the benefits to society of deposit insurance we have established the fact that by accepting such highly liquid liabilities as demand deposit and savings accounts, banks and thrifts have gone into the businesses of substituting their own liquidity risk for the liquidity risk of households and firms, in an attempt to earn profits. But this now merely transfers the inherent problem concerning a lack of information about financial strength from individuals and businesses to depository institution. Individual depositors have imperfect information concerning (1) how risky and how liquid the depository institution is asset portfolio is and (2) when, and how much, other depositors wish to withdraw. Furthermore, depository institutions typically employ a "first-come, first-served" rule in honoring deposit redemption.
Because depositors Know that not all depositors can get their funds back, one ‘s place in line matters and runs are possible. Note that runs are quite rational from the individual depositor‘s point of view. But there are social costs to runs: Runs on insolvent depository institutions may lead to runs on solvent institution; and if many banking institutions fail, the total quantity of credit-and of money, because demand and other checkable deposits are part of the quantity of money-will fall dramatically. As a result, the flow of economic activity-national income, national output, and employment-can be adversely affected. enter the federal deposit insurance scheme.
Now the insurer Has the problem Note, however, that the problem concerning lack of information about specific enterprise remains. the Federal deposit insurer must now be concerned with the solvency of those institutions that it is insuring. the insurer, therefore, incurs the costs of gathering and evaluating information about the condition of depository institutions; those costs exist whether or not a specific institution fails. if an institution does fail, the federal deposit insurer incurs the additional expense of paying the claims of the insured depositors.
If the deposit insurer does not price its services properly, then depository institutions have an incentive to increase their profits by taking on additional risk. but in practice it is extremely difficult for even the federal deposit insurer to measure the risk of insured banks. Presumably the risk of an insured bank to the federal deposit insurer is indicated by the variation in the bank‘s future net income stream; but one cannot directly observe today the future results of specific bank management decision. in practice, deposit insurers measure a bank ‘s risk by the degree of variability in its past earnings.
Saturday, June 13, 2009
protection of the depositor by FDIC
IN addition to protecting depositors against loss, the FDIC makes such deposits promptly available in the event of bank failure. In most cases, In 10 days to 2 weeks after the closing of the bank the depositors receive a substantial proportion of their insured deposit directly from the FDIC. If the distressed bank has been placed in receivership, the remainder of the depositor claim is paid after certain assets of the bank have been liquidated.
establishment of the federal deposit insurance corporation
with the establishment of the FDIC in 1933, an important concerned not only with the safety of depositors, but with the overall stability of the banking industry, came into existence. when the FDIC was organized, all member banks of the federal Reserve System were required to join. Noninsured state banks were given the option to apply to the corporation for admission to insurance. A sufficient number of these state banks, along with those banks in the federal Reserve System, did apply for insurance, so that more than 90 per cent of all commercial banks have been covered by this depositor insurance since January 1,1934. since November 27,1974, each account has been insured up to $40000.
Most commercial bank are insured In 1977, the FDIC insured 14,425 commercial banks with total assets 0f $1,040 billion. Only 293 small banks with total assets of $33 billion were noninsured.
Bank Application for insured status Most newly established banks apply, even before they open their doors, for such deposit insurance. When a bank applies to the FDIC for insured status, the FDIC considers the following factors: the financial history and condition of the bank, the adequacy of its capital structure, its future earnings prospects, the general character of its management, the convenience and needs of the community to be served by the bank, and the consistency of the bank's corporate powers with the purposes of the Federal Deposit Insurance law. Although most banks applying for insurance are likely to be newly organized banks, some banks already in operation, but hitherto not insured, also make such application. in 1976, for example,the FDIC approved application for deposit insurance of 112 banks and denied only 10 application. (four were subsequently approved following amendments to the applications.) IN 1977, there were 104 applications; only six were denied.
Most commercial bank are insured In 1977, the FDIC insured 14,425 commercial banks with total assets 0f $1,040 billion. Only 293 small banks with total assets of $33 billion were noninsured.
Bank Application for insured status Most newly established banks apply, even before they open their doors, for such deposit insurance. When a bank applies to the FDIC for insured status, the FDIC considers the following factors: the financial history and condition of the bank, the adequacy of its capital structure, its future earnings prospects, the general character of its management, the convenience and needs of the community to be served by the bank, and the consistency of the bank's corporate powers with the purposes of the Federal Deposit Insurance law. Although most banks applying for insurance are likely to be newly organized banks, some banks already in operation, but hitherto not insured, also make such application. in 1976, for example,the FDIC approved application for deposit insurance of 112 banks and denied only 10 application. (four were subsequently approved following amendments to the applications.) IN 1977, there were 104 applications; only six were denied.
Friday, June 12, 2009
the federal deposits insurance corporation
Individual member banks may satisfy some of their liquidity needs by borrowing from their regional Reserve Banks. These commercial banks, and others as well, may also use the newer techniques of liquidity management and borrow excess reserves from other banks in the federal funds market. As already noted, they may also secure added deposits by issuing certificates of deposit, or even secure funds from their bank holding company, which may have floated an issue of commercial paper. But if the banks having thus secured additional funds proceed to make unwise loans or acquire investments that subsequently decline in price in the market, the bank itself may go into bankruptcy with grievous loss to its many depositors.
prior to the banking Act of 1933, which established the federal Deposit insurance Corporation (FDIC) as of January 1,1934 each bank had to take its own steps to safeguard its depositors. The various reserve requirements established by state laws, the national banking Act of 1863, and finally the federal Reserve Act of 1913, all had as underlying philosophy the idea that depositors would be protected by banks carrying reserves, as well as by preventing an overextension of bank credit in speculative ventures. After 1913, the possibility of rediscounting eligible paper by the member banks at the various federal reserve Banks also seemed to offer reassurance to depositors that, if they wished to withdraw their money,the member banks could secure the needed cash.
Nevertheless, these safeguards did not prove sufficient. the high casualty rate of commercial banks in the 1920 's and 1930's has already been described. In the widespread bank runs of the depression days of the early 1930's , even sound banks were sometimes forced to close their doors because of an inability to meet the heavy cash withdrawals of their panicky depositors. As a result, bankers have gained the reputation for being conservative and cautious in their lending and investing activities. Many senior bankers in their own lifetimes have seen what happened to less prudent bankers. Each bank, therefore, and properly so, has felt it necessary to be concerned with its own liquidity requirements and hence with the safety of its deposits.
prior to the banking Act of 1933, which established the federal Deposit insurance Corporation (FDIC) as of January 1,1934 each bank had to take its own steps to safeguard its depositors. The various reserve requirements established by state laws, the national banking Act of 1863, and finally the federal Reserve Act of 1913, all had as underlying philosophy the idea that depositors would be protected by banks carrying reserves, as well as by preventing an overextension of bank credit in speculative ventures. After 1913, the possibility of rediscounting eligible paper by the member banks at the various federal reserve Banks also seemed to offer reassurance to depositors that, if they wished to withdraw their money,the member banks could secure the needed cash.
Nevertheless, these safeguards did not prove sufficient. the high casualty rate of commercial banks in the 1920 's and 1930's has already been described. In the widespread bank runs of the depression days of the early 1930's , even sound banks were sometimes forced to close their doors because of an inability to meet the heavy cash withdrawals of their panicky depositors. As a result, bankers have gained the reputation for being conservative and cautious in their lending and investing activities. Many senior bankers in their own lifetimes have seen what happened to less prudent bankers. Each bank, therefore, and properly so, has felt it necessary to be concerned with its own liquidity requirements and hence with the safety of its deposits.
Sunday, May 10, 2009
Insurance Companies
Insurance Companies protect individuals against risk.Life insurance companies accept regular payments from individuals in exchange for contracted payments in the event of the insureds' death. By insuring a large pool of individuals,life insurance companies can consult actuarial tables and predict very accurately what percentage of the insured individuals will die each year.Because of this ,life insurance companies old long-term assets,including long-term bonds. They also old substantial quantities of commercial real estate. Loans make up only about 24 percent of assets,and the majority,roughly 20 percent,are mortgage and other real estate loans. The bulk of life insurance company assets,around 76 percent,are not in loans. This is in sharp contrast to both commercial banks and savings and loans. Furthermore,the assets insurance companies hold are purchased with insurance premiums rather than deposits. Thus,it is not possible to write a check against an insurance policy.
Other insurance companies,called fire and casualty insurance companies,insure against loss from fire,theft,and accident.If you own a car or a house,you probably have purchased this type of insurance.Insurance claims on these policies are somewhat less easy to predict. More important,the duration of the liability (e.g.,the"life expectancy" of your car)is lower than for life insurance,so these companies usually invest in more liquid, shorter-term assets.
Other insurance companies,called fire and casualty insurance companies,insure against loss from fire,theft,and accident.If you own a car or a house,you probably have purchased this type of insurance.Insurance claims on these policies are somewhat less easy to predict. More important,the duration of the liability (e.g.,the"life expectancy" of your car)is lower than for life insurance,so these companies usually invest in more liquid, shorter-term assets.
Wednesday, May 6, 2009
source of income for the federal Deposit insurance Corporation
Having considered earlier the amount of disbursements by the corporation to depositors when banks have failed, It might be well to consider the sources of income and financial status of the FDIC. insured banks have been required since 1935 to pay an assessment rate of 1\12 of 1 per cent of their assessable deposits. The Federal Deposits Insurance Act of 1950 provided for a credit against current assessment, which first amounted to 60 per cent of the prior years 's net assessment income, but was raised to 66,2\3 per cent in 1961. In 1976 an amount of $380 million was credited to banks against their future assessments, thereby reducing the effective assessment rate in that year to 1\27 of 1 per cent of assessable deposits.
From these assessments and investment income, after deducting losses and operating expenses, the corporation was able by the end of 1976 to build up a deposit insurance fund of more than $7 billion, which was virtually all held in U.S. government securities. (in 1976 investment income was $445 million, whereas assessment income totaled only $296 million.) In the event of future insurance losses the FDIC not only can draw on these accumulated investment assets but is also authorized to borrow from the U.S. Treasury up to an additional $3 billion, if needed. So far the latter borrowing authority has never been used, because the income received by the FDIC has been far more than adequate to pay all expenses, including losses of failing banks insured by the FDIC.
From these assessments and investment income, after deducting losses and operating expenses, the corporation was able by the end of 1976 to build up a deposit insurance fund of more than $7 billion, which was virtually all held in U.S. government securities. (in 1976 investment income was $445 million, whereas assessment income totaled only $296 million.) In the event of future insurance losses the FDIC not only can draw on these accumulated investment assets but is also authorized to borrow from the U.S. Treasury up to an additional $3 billion, if needed. So far the latter borrowing authority has never been used, because the income received by the FDIC has been far more than adequate to pay all expenses, including losses of failing banks insured by the FDIC.
Wednesday, April 15, 2009
economics of insurance(5)
Obviously, the law of diminishing marginal utility-which makes the satisfaction from wins less important than the privation from losses-is one way of justifying the above reasoning.This law of diminishing marginal utility tells us that a steady income,equitably divided among individuals instead of arbitrarily apportioned between the lucky and unlucky people whose house did or did not burn down,is economically advantageous (Also,when a family chooses to buy hospital and medical insurance,it may express the belief that this will be relatively painless,forced"saving against a rainy day." this self-imposed "compulsory-saving" feature is another benefit of insurance)
Quite a few nations and several of the states-New York,New jersey,New Hampshire, Massachusetts-have been helping pay for government and relieving the tax burden by introducing official lotteries and even off-track betting.The cynical notion here is that one might as well channel private vices to the public good.Also,there is the realistic consideration that law enforcement to rule out illegal gambling may be quite imperfect: legal gambling may be a way of checking organized crime.
Quite a few nations and several of the states-New York,New jersey,New Hampshire, Massachusetts-have been helping pay for government and relieving the tax burden by introducing official lotteries and even off-track betting.The cynical notion here is that one might as well channel private vices to the public good.Also,there is the realistic consideration that law enforcement to rule out illegal gambling may be quite imperfect: legal gambling may be a way of checking organized crime.
economics of insurance(4)
At this point,a sporting man will say,"So what?Of course,a man gambles when he does not buy insurance.But the odds on such a bet are not unfavorable.In fact,they are favorable,because we know that the insurance company is not in business for its health.it must keep records,support insurance salesmen,and so forth.All this costs money and must be "Loaded"onto the insurance premium,detracting from the perfect mathematical odds of the buyer and making the odds for the non buyer better."
To which a rational man will reply; "When I am among friends,i don,t mind a small game of chance for relaxation even at slightly unfavorable odds.But when a big bet is involved,even if the odds are favorable,then I pass.I insure my house because I hardly miss the premium each year;but if it burned down without being covered,I,d feel the loss an awful lot.When I insure,my living standards over time and my income remain the same,come what may.when I don,,t insure,I may be up for a while,but I risk going way down."
To which a rational man will reply; "When I am among friends,i don,t mind a small game of chance for relaxation even at slightly unfavorable odds.But when a big bet is involved,even if the odds are favorable,then I pass.I insure my house because I hardly miss the premium each year;but if it burned down without being covered,I,d feel the loss an awful lot.When I insure,my living standards over time and my income remain the same,come what may.when I don,,t insure,I may be up for a while,but I risk going way down."
economics of insurance(3)
the insurance company is not gambling , because what is unpredictable and subject to chance for the individual is highly predictable and uniform in the mass. whether john C.smith,age twenty and in good health, will live for 30 more years is a matter of chance,but the famous law of large numbers guarantees that out of 100,000-odd twenty-year-old in good health,only a definite proportion will still be alive at the end of such a period.The life-insurance company can easily set a premium at which it will not lose money.Hence,the company certainly is not gambling.
What about the buyer of insurance? is he gambling?The reverse can be shown to be true;The man who does not insure his house is doing the gambling.he is risking the whole value of his house against the small premium saved.If his house dose not burn down in any year,the non insurer has won his bet;if it dose,as occasionally must happen.he loses his bet and incurs a tremendous penalty.
What about the buyer of insurance? is he gambling?The reverse can be shown to be true;The man who does not insure his house is doing the gambling.he is risking the whole value of his house against the small premium saved.If his house dose not burn down in any year,the non insurer has won his bet;if it dose,as occasionally must happen.he loses his bet and incurs a tremendous penalty.
economics of insurance(2)
What is true of fire insurance is equally true of life,accident,automobile,or any other kind of insurance Actually,at the famous Lloyd ’S of London,which is a place for insurance brokers to come together,you can arrange to insure a ball team or vacationer against rain,dancers against infantile paralysis,and a hotel keeper against a damage suit from the window of a man killed in a fight with another man who bought a drink in the hotel,s cocktail lounge;and you can get numerous other bizarre policies. But by the common law,Lloyd ,s may refuse to bet $10.000 with me that it will not snow on Christmas,since I do not have an "insurable interest"of that amount and the bet would be unenforceable in the courts.However,a ski-resort owner,who stands to lose that much if it dose not snow,would have such an insurable interest and could certainly buy such a policy. Economic theory shows that the difference between these two cases is that insuring the resort owner stabilizes income while insuring me destabilizes it.
economics of insurance(1)
We are now in a position to see why insurance. Which appears to be just another from of gambling.actually has exactly opposite effects. For the same reasons that gambling is bad,insurance is economically advantageous. Whereas gambling creates risks,insurance helps to lessen and spread risks.
In buying fire insurance on his house,the owner seems to be betting with the insurance company that his house will burn down.If it dose not-and the odds are heavily in favor of its not burning-the owner forfeits the small premium charge. If it dose burn down,the company must reimburse the owner to the tune of the agreed-upon loss.(For the obvious reason of removing temptation from hard-up home owners who like fire engines and excitement,the face value of the policy tends to be something less than the money value of the property insured.)
In buying fire insurance on his house,the owner seems to be betting with the insurance company that his house will burn down.If it dose not-and the odds are heavily in favor of its not burning-the owner forfeits the small premium charge. If it dose burn down,the company must reimburse the owner to the tune of the agreed-upon loss.(For the obvious reason of removing temptation from hard-up home owners who like fire engines and excitement,the face value of the policy tends to be something less than the money value of the property insured.)
what can be insured(2)
obviously, agreat fire like that of Chicago in 1871 or of the San Francisco earthquake would subject all the buildings in the same locality to the same risk. the company would be making a bet on one event , not on thousands of independent events. instead , it must diversify its risks . private companies cannot , without government aid , bear the risks of nuclear-war insurance . Nor is it possible to buy unemployment insurance from a private company . Depressions are great plagues which hit all sections and all classes at one and the same time , with a probability that cannot be computed in advance with any precision . therefore only the government , whose business it is to take losses, can assume the responsibility of providing unemployment compensation .
There will probably always remain numerous risks of personal and business life. No one can insure the success of new shop , anew mousetrap , or a hopeful opera singer. without error there cannot be trail ; and without trail there cannot be progress.
There will probably always remain numerous risks of personal and business life. No one can insure the success of new shop , anew mousetrap , or a hopeful opera singer. without error there cannot be trail ; and without trail there cannot be progress.
what can be insured
undoubtedly,insurance is highly important way of spreading risks.why,then, can we not insure ourselves against all the risks of life ? the answer lies in the indisputable fact that certain definite mathematical conditions are necessary before sufficiently exact actuarial probabilities can be determined .
first,we must have a large number of events.only then will a pooling of risks and a" cancellation" and " averaging of extremes" be possible. the bank at Monte Carlo knows there is safety in numbers. the lucky streak of an Arabian prince one night will be canceled by his next night is losings or by the losings of a fake Balkan countess. once in a blue moon someone may " break the bank " ; but in few more lunar cycles the the " house " will more than break even. large numbers alone are not enough. No prudent fire-insurance company would confine itself to the island of Manhattan even though there are thousands of buildings there. the uncertain events must be relatively independent . Each throw of the dice, each chance of loss by fire, should stand relatively by itself.
first,we must have a large number of events.only then will a pooling of risks and a" cancellation" and " averaging of extremes" be possible. the bank at Monte Carlo knows there is safety in numbers. the lucky streak of an Arabian prince one night will be canceled by his next night is losings or by the losings of a fake Balkan countess. once in a blue moon someone may " break the bank " ; but in few more lunar cycles the the " house " will more than break even. large numbers alone are not enough. No prudent fire-insurance company would confine itself to the island of Manhattan even though there are thousands of buildings there. the uncertain events must be relatively independent . Each throw of the dice, each chance of loss by fire, should stand relatively by itself.
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