Insurance only applies in case of pure risks, where it protects against loss that may arise. Speculative risks cannot be insured
The insurer is able to assume risk and its financial impact by pooling number of risks of all the insured similarly placed and exposed to possibility of loss due to a peril
The whole mechanism of insurance involves pooling of a large number of statistically similar risks so that the law of large numbers would operate and the probability of number of losses (frequency) as well as the extent of loss (severity) becomes predicta
Risk Burden - Burden of risk refers to the costs, losses and disabilities one has to bear as a result of being exposed to a given loss situation/event.
Primary burden of risk - Losses that are actually suffered by households, business units as a result of pure risk events. These losses are often direct and measurable and can be easily compensated for by insurance.
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