Part2 of "Nature of life insurance and the basic" can be found here
To insure a single life for $1,000 during a given year, it is
clear, is in the nature of a gamble, because the individual must
either die or survive that period, with the result that there is
either a 100 per cent, loss or gain. If the number of per-
sons insured is increased to one hundred the element of un-
certainty will still be present to a large extent, although the
variations in the number dying or surviving the year will be
much less than that noted in the preceding case. But if
500,000 lives of similar physical condition are combined in the
same group, and more than that number of lives are now in-
sured in each of several American companies, the fluctuation
in the rate of death from year to year will vary only by the
smallest fraction of 1 per cent., with the result that the com-
pany will be able to determine in advance the amount of its
death claims and thus to place its business upon a non-specu-
lative basis. In fact, if the number of lives insured by a com-
pany were so large as to make the application of the law of
average perfect, practically all uncertainty as to the amount
of loss that would be experienced during a given period would
be removed.
When the insurance is furnished by a company with capital
or surplus which answers as a given guarantee of stability, it
becomes a business, instead of a speculation, the distinction
being that while an individual who assumes a single risk either
loses or gains thereby the whole amount involved, the company
which takes many, by means of the aggregate business reduces
the possible variations to narrow limits and really makes of
insurance a business attended with less peril than almost any
other. . . . During a given year an individual either dies or he
survives the year; the result is a 100-per-cent. loss or
a 100-per-cent. gain, if one wagers upon the one life. But
make one hundred thousand of these bets upon persons of
the same age and like physical condition and the variation in
the result will not be 2 per cent, usually, instead of 200 per cent.
There is nothing more uncertain than life and nothing more
certain than life insurance.
Necessity of Accumulating a Fund for the Payment of
Claims. While all forms of insurance are alike in that they
require for their successful operation a combination of many
risks into a group, they are vitally different as regards the
nature of the risks covered. In this respect the chief differ-
ence between life and other forms of insurance is that in the
latter the contingency insured against may or may not hap-
pen, and as regards the great majority of policies written,
does not happen, while in life insurance the event against
which protection is granted, namely death, is a " hazard con-
verging into certainty." It is necessary, therefore, if a life-
insurance policy is to protect the insured during the whole of
life, to provide not only against the risk of death each year,
but also to accumulate an adequate fund for the purpose, as
Mr. Dawson states, "of meeting at the ultimate limit of
human life an absolutely certain claim if one has up to that
time been escaped." He further adds : " It was failure to
see the necessity for providing for an increasing hazard, con-
verging into certainty, which has caused many serious errors
in the fundamental plans of some institutions formed to
furnish life insurance, and the thing which separates plans
of insurance into sound and unsound is precisely whether
intelligent regard for this principle has guided the company
in determining its rates of premium and the management and
disposition of its funds."
