Discuss the following questions You have decided to start a

Discuss the following questions:

You have decided to start a new insurance company. You decide to call it Isla Vista Insurance Co. Inc. You persuade 10 of your friends to contribute $100 each. So the company has paid-in capital of $1,000. You develop a new one-year term insurance product with a $1,000 benefit. You charge $50 for this policy. Question: how would you go about determining how many (if any) of these policies you should sell? How could an insurer manage its risk if it did not obtain evidence of insurability?

Solution

1. This depends on the probability that how many would be using the insurance in a year. However if we consider that everybidy woiul dbe using this amount each year then

5 x number of insurers = 1000

number of insurers = 1000/ 5

no of insurers = 200

At least 200 policies should be sold so that if everybody takes up the insurance then tehre would be no loss. In reality few require insurance amount and the company benefits from other insurance subscribers.

2. Insurability refers to whether a risk is insurable. When the risk is not inusrable, the insurer could save small amounts to create a pool of amount for cases of adversity.