Library of Congress Cataloging-in-Publication Data Outreville, J. Francois (Jean Francois)
Theory and practice of insurance / by J. Francois Outreville.
Includes bibliographical references and index.
ISBN 978-1-4613-7836-5 ISBN 978-1-4615-6187-3 (eBook)
1. Insurance. 2. Risk management.
1. The Meaning of Risk
2. Insurance and Economic Development
3. Insurance in the World Economy Today
4. Risk Management Concepts
5. Risk Analysis Fundamentals
6. Risk Financing Decisions
7. Risk Aversion and Insurance
8. Insurance Concepts
9. Pricing Insurance Contracts
10. Retention, Self-Insurance
11. Organization of Insurance Markets
12. Operations of Insurance Companies
13. Reserves and Investments
1 4. Reinsurance
15. Financial Reporting and Performance
1 6. Supervision of Insurance Operations
Often students do not read the preface of a textbook, however it frequently happens that the introduction clarifies the meaning of the text.
A Look at the Past, the Present and the Future Risk! Uncertainty! Loss! these words are frequently in the minds of people
involved in decision taking. The first scholarly treatment of the area of risk in relation to insurance was “The Economic Theory of Risk and Insurance” by Allan H. Willett originally published as one of the Columbia University Studies
in History, Economics and Public Law)
During most of the econorilic history, risk and uncertainty have been a subject for sociologists but it was rather taken for granted in a given cultural environment. In 1921, Frank Knight wrote a comprehensive book on the subject of “Risk, Uncertainty and Profit”.2 The risks that he discussed were more or less limited to the “entrepreneurial” type. The field of the pure risk linked to the vulnerability of systems, was still considered too secondary to be
treated as a priority among the managerial objectives of the firm.
Classical economic theory was based on the assumption of certainty. This was a deterministic approach which ignored the economic behavior of individual agents. Thanks to the work by Allais, Arrow and Debreu in 1953,3 new developments in economic theory analyze how the traditional competitive analysis can be extended to treat lIDcertainty. By assumption there are risks, ‘contingent goods· or “contingent claims”, and there are contracts by which risks are implicitly or explicitly transferred from one economic agent to another economic agent, e.g. labor contracts, financial securities and insurance contracts.