Theoretical Construction of Life Insurance

KEY WORDS

1. Elements of life insurance 

2. Bet Duality 

In the following we will introduce the most general “building blocks” of life insurance in order to be able to place all possible (traditional and modern) life insurances in a uniform frame.

1. Since there are generally negative associations tied to betting, it is not surprising that insurance studies don’t advertise this “relation”, or if it is mentioned at all, they try to deny it with all power

2. Despite this, the situation is that insurance is a special kind of bet, where the subject of the bet is undoubtedly the incurrence of an event having negative consequences, and where the insured – in a certain sense – makes a bet against himself. The first insurance (that is regarded as an insurance) is supposed to have been formally a bet, where the owner of the ship took his bet on the ship not returning to the harbour with the carried goods. If he lost the bet, then in reality he won, because the ship returned safely,

3. In case of life insurance – following the pattern of the two possible life insurance events – two kinds of possible bets can be defined. The insured either makes his bet on that:

1. he dies during a certain period, or that.

2. he doesn’t die during a certain period. 

3. We discover one or both of these bets in all possible types of life insurances116, this way we can look at them as the elements of insurance, that constitute all life insurance products. The same way as in the bet, there are two parties in an insurance, and the strategies of the two parties are exactly opposite. When the client bets on that he dies within a certain period, then the insurer in contrast, takes the bet on that he doesn’t die within a certain period, so his strategy is the other possible outcome. 

4. This way, regarding the bet, the position of the insurer and the client is dual – the insurer takes exactly the opposite bet as the client. But it is important to add that the financial position of the insurer and the client is not the same, so only those bets are possible in insurance, where the insurer is the „bookmaker” at the same time, so the client pays his stack in advance to the insurer. 

> From the two elemental bets we can build two very simple life insurances: 

1. A short term, single premium term insurance: I bet I’ll die during this period. 

2. A short term, single premium pure endowment insurance: I bet I won’t die within a certain, well defined period. 

5. In the above the premise “short term” is important, because we can only disregard the interest return of the deposited money in the short term. If, on the other hand, we want to take a bet of a longer term, we have to ensure an interest. This way beside the above two elements we need a third element for the construction of life insurance that, for the sake of