C16 The Business of Insurance 98 Questions And Answers

List the two fundamental principles of insurance. - ️️1. The premiums of the many are used to pay the losses of the few. 2. The premiums shall be commensurate with the risk. -Insurance fulfils a societal need -Provides consumers with financial security for particular types of accidental losses. Also underpins the economy facilitating economic growth and societal development -Insurance is the promise to indemnify another person against the possibility of a loss -Significant claim is paid based on a nominal premium Why would an insurer spread risks over diverse geographic areas? - ️️1. Risks spread over a larger geographic area soften the burden of localized disasters on insurers. 2. For example, a severe windstorm in one part of the country would have a devastating effect on an insurer who had concentrated its risks in this one area. What is a risk pool? - ️️1. A risk pool is a sharing and spreading of risk between insurers and re-insurers. 2. Formed risk pools are syndicates of insurance or reinsurance companies that have organized to underwrite a particular risk or group of similar risks. Explain the law of large numbers. - ️️1. A mathematical premise which states that the degree of uncertainty is reduces as the number of events increase.