Insurance - reducing risk, Microeconomics

Assignment Help:

Insurance

- Risk averse are willing to pay to keep away from risk.

- If cost of insurance equals expected loss, risk averse people will buy sufficient insurance to totally recover from the potential financial loss

* While expected wealth is same, the expected utility with the insurance is greater because the marginal utility in event of the loss is greater than if no loss occurs.

* The purchases of insurance transfers the wealth and increases expected utility.

* The Law of Large Numbers

- Though single events are random and unpredictable, the average outcome of many identical events can be predicted.

* Examples

- A single coin toss versus large number of coins

- Whom will have a car wreck versus the number of wrecks for the large group of drivers

* Assume:

- 10% chance of a $10,000 loss from the home burglary

- Expected loss = .10 x $10,000 = $1,000 having a high risk

- 100 people face same risk

* Then:

- $1,000 premium generates a $100,000 fund to cover the losses

- Actuarial Fairness

When insurance premium = expected payout

Related Discussions:- Insurance - reducing risk

Currency was used in the 1700s, What currency was used in the 1700s? Ans...

What currency was used in the 1700s? Ans) this is depends on the country. Most currencies, though, were based on gold and silver. In America, in the 13 colonies, tobacco wa

Advantages and disadvantages of a monopoly market, Problem 1: i) ‘There...

Problem 1: i) ‘There is a trade-off between inflation and unemployment.' Do you agree with this statement? Justify your example using appropriate diagrams. ii) Mauritius is

Production functions, types of production function

types of production function

Critique of cost-benefit studies, Normal 0 false false fals...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Structural unemployment, Structural Unemployment: This is unemploymen...

Structural Unemployment: This is unemployment resulting from changes in the pattern of demand for goods and services or changes in technology.These changes may in turn alter

Define solvency margin, In relation to solvency margins in the insurance in...

In relation to solvency margins in the insurance industry, the solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen ev

Will governments follow good policies, Will Governments Follow Good Policie...

Will Governments Follow Good Policies? That governments can assist in development and growth doesn't mean that governments will. The broad experience of growth in developing ec

Economics, What happens when oil eventually runs out?? can''t we just pay ...

What happens when oil eventually runs out?? can''t we just pay doctors and nurses more money?? The unemployed should get off their backsides and get a job??

Supply, #1 explain with the aid of diagram the effect of an increase in dem...

#1 explain with the aid of diagram the effect of an increase in demand for palm oil on the equilibrum position for palm kernel

State the example of price and price level, State the example of price and ...

State the example of price and price level Create a basket which contains all the goods sold by a specific store on a specific day. Price of this basket is then a price level -

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages