Traditional insurance involves the pooling of similar risks and the sharing of losses.
i. Explain how pooling arrangements reduce risk.
ii. What is adverse selection? Why must insurance companies control this problem?
1: Pooling arrangements are in sync with the concept of insurance. A group of insured with similar risks group together to obtain better bargaining power and better rates from the insurance company. They get higher buying power and the risk of loss is spread out.
2: Adverse selection refers to use of assymetric information. Sellers have access to information which buyers do not have. This is the tendency of high risk individuals who are in dangerous jobs to obtain life insurance. This leads to higher risk for the insurance companies. The companies control this problem by raising premium and by limiting coverage.
Traditional insurance involves the pooling of similar risks and the sharing of losses. i. Explain how pooling..
8) How do insurance companies reduce their vulnerability to adverse selection - Explain & give examples
Characteristics of an Insurable Risk 1) Large number of similar objects 2) Losses are accidental/unintentional 3) Losses can be determined/measured 4) Losses should not be catastrophic 5) Large Loss Principle 6) Insurable Interest Insurance companies (or insurers) prefer their risks to have the six characteristics of Insurable risks. Can you think of any insurable risk that lacks any one of the characteristics? You can name the risk, loss exposure or peril and explain what characteristics this lacks.
Insurance companies in general must guard against having a disproportionate number of bad risks as policyholders. For their own profitability, they need to see the total payouts for a year as a fairly small percentage of the total premiums. This fundamental problem for insurance companies is known as a.inflation risk. b.co-insurance. c.adverse selection. d.deductible risk. e.rate of return risk. 1.I am insurance that provides for living and illnesses generally associated with nearing end-of-life, which frequently have my policyholders being in assisted...
A group of food processing businesses are pooling capital to begin an insurance company, GULP Insurance LLC. Their goal is to provide a layer of property insurance protection for each investing company, and eventually sell policies to others (who are not investors) through a distribution system. They have established a company in the state of Connecticut, and will be selling policies in New York, New Jersey and Connecticut. The product is specialty commercial property Coverage for food processors, and they...
Explain how and why the following characteristics of pure risk influence the availability of insurance from the point of view of SUPPLIERS of insurance. a) iThe size of the possible loss ii) The measurability of losses iii The predictability of losses iv The degree of correlation between losses vMoral hazard vi Morale hazard vii) Legal purpose vii Moral purpose (25 marks) b) Explain (with examples) how "words' can be included in insurance contracts to 'shape' is cs ull恥300 y products....
1.What insurance activities are permitted for U.S. commercial bank holding companies? a.What is shadow banking? How does the shadow banking system differ from the traditional banking system? b.What is the Basel Agreement? c.What is the difference between Basel I, Basel II, and Basel III? d.What components are used in the calculation of credit risk–adjusted assets?
3. i) To assist in ensuring adequate and affordable health care for all, the federal government has mandated that health insurers provide health insurance to all, regardless of their physical condition. Insurers may not reject coverage for pre- existing health problems. Explain why this mandate, standing alone, creates tremendous potential for adverse selection problems. ( 5 mark ) ii) Many health and casualty insurance policies require policyholders to pay a certain amount (called a deductible) for claims before the insurer...
I need help with part c & d! Kisk Pooling Ollante Pobabilities of those outcomes used as J U U possible out 9 Spreoding the Spreading the risk of a payout over a lo group of people 2. Suppose that there are two possible states, completel of $80,000 if they remain completely healthy. H here are two possible states, completely healthy and ill. Consider an individual who has an income textbook and represents the total (actual) and expected wy remain...
OPS Practice quiz 2. The benefits of risk pooling depend on the behavior of demand from one market relative to demand from another. True False 3. What is Supply Chain Management? A set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses and stores so that merchandize is produced, distributed at the right quantities, to the right locations and at the right time in order to minimize system wide costs while satisfying service level requirements. The management of the flow...
c Date: Class (First Pagr) Date: Class (Subsrquent Pagrs) If you are risk avene a. You value a lohery a moee than is expected value. b You ike to uke gambles. c. A loaery is worth kess to you than iks expected vaue d You advertise your anihude twward risk. When farmers sell forward contracts in spring for the harvest they will reap in Autumn a. Their planting decisions are riskier due to increased uncertainy b They accrpt a price...