RMI 2101 Exam 3 Latest Update Graded A+

RMI 2101 Exam 3 Latest Update Graded A+ Insurance Supply Insurers are willing to sell insurance at a particular price. Pi Price of insurance Pi = P* + Risk Charge + Loading Pmax the most an individual will pay for insurance for a particular risk. Risks are insurarable if.. Pi < Pmax Why might Pi > Pmax? - Pi is too high - risk charge is too high, loading costs are too high. - Pmax is too low - individuals underestimate the severity or frequency of the loss. Moral hazard created by disaster relief (floods) - where insurance like benefits exist #1 Large number of similar objects -life insurance, automobiles. nature of objects are similar so reliable statistics can be formed. -Also need to be concerned with adverse selection --where something does not occur randomly. adverse selection aka anti selection or negative selection demand correlates to risk, info is only known to the insured. Impact on price could lead to collapse of insurance pool, product, or market #2 Losses are accidental or unintentional -need to be fortuitous in nature. must be some uncertainty or no risk -insured should have no control over frequency or severity. -avoid moral hazard and gambling why is there a problem when losses are accidental or unintentional? what are the solutions? P* goes up, Pi goes up, Pi > Pmax solutions: deductible or copay, claims investigation, policy limits #3 Losses can be determined and measured -Did loss occur? -- not always easy for insurer to determine. -What are losses? -- How do we measure pain and suffering? Cover mental illness for 3 years #4 Loss shouldn't be catastrophic to the insurER -catastrophic to the insurED is ok. normally one event random means one claim when 1 random events results in many losses - big problem (natural disasters) Law of large numbers assumes that ____________ ____________ in question are independent events random events Solutions to catastrophic loss include good underwriting, diversify risk, reinsurance #5 Large loss principle max possible loss needs to be sufficient small losses better paid off through savings #6 Insurable Interest Must demonstrate some personal loss in the event of a loss, insured must lose financially or incur some other type of harm in order for there to be a contract all valid contracts must have _______ _________ insurable interest purpose of insurable interest reduces moral hazard serves as a measure for the amount of recovery in the event of a loss strongly supports the principle