B. THE EFFECT OF THE LAW OF AVERAGES Al^ID 

 COMPETITION ON THE REVENUE OF INSURERS 



In the beginning of this chapter the insurer's business 

 objectives were stated in simple terms. In order to maximize his 

 profits or minimize his losses, his efforts are concentrated, on 

 the one hand, to increasing his revenue from premiioms and, on the 

 other hand, to keeping his losses and expenses to a minira\im. Al- 

 though these tvo major functions of the insurer are closely inter- 

 related, for the sake of an orderly presentation of the material, 

 this topic includes only the factors which put limitations on the 

 revenue vhich the insurers realized from charging the insured 

 commercial fishing vessels a premiiom. 



For the purpose at hand, the operation of the law of averages 

 is briefly explained, its importance to the subject analyzed, and 

 the adverse effect of competition among insurers ajid brokers or 

 agents is discussed from the vle'vrpoint of restricting the revenue 

 of the former. This study shows that the revenue of insurers was 

 limited in two ways: first, by the failure of insurers to 

 differentiate adequately among risks and second, by the failure 

 of insurers to charge higher premiums . 



1. The probable effect of the law of averages on risk 

 differentiation . The first explanation of the insurer's posi- 

 tion in the problem is given by the limitations of the law of 

 averages. The ideal operation of the law of probability pre- 

 supposes that first, the probability of loss is identical, and 

 second, the number of risks is large and well enough dispersed 

 geographically to secure stability of occurrence of accidents. 

 Under such ideal conditions, the expectation of loss is deter- 

 mined by the amount of insurance at stake . As the number of 

 risks decreases and the probability of loss is not identical, 

 the task of the underwriter becomes more difficult and his esti- 

 mation of the expectation of loss less accurate. 



No hazard has the above mentioned two conditions to a degree 

 which would assure the ideal operation of the law of probability. 

 In reality, some hazards approach the ideal conditions and others 

 lie near the opposite extreme where the risk is nonmeasurable and 

 the insurance contract becomes a imger. 



The foregoing remarks, together with discussions in previous 

 chapters indicate clearly that the law of averages operates on 

 commercial fishing vessels under severe limitations. Neither was 

 the number of commerciEil fishing vessels insured by each individual 

 insurer adequate to secure stability of accident occurrence nor was 



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