PRINCIPLES OF RURAL ECONOMICS 



to pay a premium of $ 100 every 5 years for the sake of being 

 insured. 1 A hundred dollars paid in any one year would cost 

 him in the way of sacrifice an amount of utility represented by 

 such a parallelogram as HCGB. In eleven payments, each cover- 



ing a period of 5 years, he 

 would have paid $ 1 1 oo, 

 which would make a total 

 sacrifice represented by the 

 parallelogram DCAB. But 

 the loss of $1000 in any 

 one year would involve a 

 sacrifice represented by the 



D 



AF 



GB 



irregular surface ECFB. 



Since this surface is larger than the parallelogram DCAB, he 

 would lose less in the way of real utility by paying $1100 in 

 55 years than by losing $1000 in any one year. 



In the case of ordinary insurance the shifting of the risk 

 from the insured to the insurer does not diminish the number 

 of losses to be borne, but it diminishes the amount of risk be- 

 cause the loss can be more easily borne by those upon whom it 

 is shifted ; it bears less heavily upon the insurer than it would 

 upon the insured. It is for this reason that the insured can 

 afford to pay in premiums more than enough to enable the in- 

 surer to meet the losses. This familiar principle of insurance 

 explains how it happens that there are profits in the insurance 

 business. 



It is evident that in the case of the farmer, as was shown to 

 be true in the case of the insurance company, so much of his 

 gross income as is necessary to cover his real risk, or to make 



1 The premium of $100, if we take interest into account, might be reduced 

 to the sum which, principal and interest together, would equal $100 in 22\ 

 years, that is, the average time between the payment of the premium and the 

 loss by fire. 



