Reference no: EM132861862

Cameron and Adriana both students in GBUS 1060-Insurance and Risk Management, decide they cannot afford to buy auto insurance. They are in a class with 160 students, and they come up with the idea of sharing the automobile risk with the rest of the students. Their professor loves the idea and asks them to explain in detail how it will work. She is also a little concerned they are not aware of the potential risk with this type of self-insuring as opposed to buying an insurance policy. So she has asked each student to answer the following questions.

1. If you expect to have only three losses per year on average (called frequency) for a total of $10,000 each (called loss severity), what will be the cost of sharing these losses per student in the class?

2. Cameron was asked by a classmate how could this be so cheap? He explained that this experiment would not emulate an insurance company and the system will only assess the participants an equal amount of losses at the end of the year. If you join the class and pay the $300.00 premium, what is your risk with the class that you do not have with an insurance company?

3. We learned about the importance of large numbers of people insured for insurance to work. Do you think the class has enough exposures to predict only three losses a year? Explain.