ISR3701 ASSIGNMENT 1
Grading method: Highest grade
SEMESTER 2
DUE: 29 AUGUST 2025
, Question 1
Insurance operates as a financial mechanism that enables individuals and businesses
to transfer the financial burden of risk to an insurer. Four core concepts explain how this
system functions:
1. Risk Assumption
This refers to the insurer's acceptance of the financial consequences of specific risks in
exchange for premiums. When a policyholder pays a premium, the insurer assumes the
responsibility to compensate them for covered losses, such as a car accident or fire
damage.
2. Pooling
Pooling involves collecting premiums from many policyholders to create a fund. Since
not everyone will suffer a loss at the same time, the pooled resources can be used to
pay the claims of the few who do experience losses. This principle underpins the
viability of insurance.
3. The Law of Large Numbers
This statistical principle suggests that as the number of exposure units increases, the
actual results will more closely reflect expected outcomes. Insurers use this law to
predict losses more accurately. For example, an insurer covering 10,000 cars can
estimate accident claims more reliably than if they insured just 100.
4. Adverse Selection
Adverse selection arises when high-risk individuals are more likely to purchase
insurance than low-risk individuals. If not managed through underwriting or pricing, this
can lead to higher-than-expected claims, threatening the insurer’s solvency.
🔍 Summary:
Grading method: Highest grade
SEMESTER 2
DUE: 29 AUGUST 2025
, Question 1
Insurance operates as a financial mechanism that enables individuals and businesses
to transfer the financial burden of risk to an insurer. Four core concepts explain how this
system functions:
1. Risk Assumption
This refers to the insurer's acceptance of the financial consequences of specific risks in
exchange for premiums. When a policyholder pays a premium, the insurer assumes the
responsibility to compensate them for covered losses, such as a car accident or fire
damage.
2. Pooling
Pooling involves collecting premiums from many policyholders to create a fund. Since
not everyone will suffer a loss at the same time, the pooled resources can be used to
pay the claims of the few who do experience losses. This principle underpins the
viability of insurance.
3. The Law of Large Numbers
This statistical principle suggests that as the number of exposure units increases, the
actual results will more closely reflect expected outcomes. Insurers use this law to
predict losses more accurately. For example, an insurer covering 10,000 cars can
estimate accident claims more reliably than if they insured just 100.
4. Adverse Selection
Adverse selection arises when high-risk individuals are more likely to purchase
insurance than low-risk individuals. If not managed through underwriting or pricing, this
can lead to higher-than-expected claims, threatening the insurer’s solvency.
🔍 Summary:
