Important Concepts (CH 6)

Question 1

When do pooling arrangements work best?

Answer 1

when the loss exposures are independent of one another. Correlated loss exposures can also benefit, as long as they are not perfectly postiively correlated

Question 2

How does pooling reduce risk?

Answer 2

through the sharing of losses and resources

Question 3

Differences between pooling and insurance

Answer 3

1. Pooling is a risk-sharing mechanism, insurance is a risk transfer mechanism. Insurers cannot collect more premium from insureds if losses are higher than the premium, however, in pooling this can happen

Question 4

Benefits of insurance

Answer 4

1. Pay for losses
2. Manage CF uncertainty
3. Comply with legal requirements
4. Promote risk control activity
5. Efficient use of insured’s resources - don’t need to save as much for potential losses as the burden is lifted by insurance
6. Support Insured’s credit
7. Source of investment funds
8. Reduce social burden

Question 5

Characteristics of an ideally insurable loss

Answer 5

1. Pure risk
2. Fortuitous losses - eliminates moral hazards
3. Define and measurable - definite in time, cause, and location
4. Large number of similar exposures units
5. Independent and not catastrophic
6. Affordable

Question 6

What are the ways the government can be involved with insurance?

Answer 6

1. Exclusive insurer
2. Partner with private insurers
3. Compete with private insurers

Question 7

Fortuitous loss

Answer 7

a loss that is accidental and unexpected