In risk Management Define and discuss the definition of ins

In risk Management

- Define and discuss the definition of insurance. What is the impact of the law of large numbers upon insurance?

- Discuss the impact of adverse selection upon various types of insurance.

Solution

Q1) Insurance is the monetary compensation or benefit that an individual gets for a specified loss or damage of a property, life or health. Individuals pay certain amount as premium for certain period of time based on which the insurance coverage is provided as and when the event occurs. Though risk is a probability of a certain unexpected event, purchase of insurance coverage depends on the individual\'s estimation of the risk component.

The impact of the law of large numbers upon insurance is -

As the number of policyholders or exposure units increases, the prediction of loss will be more accurate based on which insurance firms calculate the permium to be charged to cover the losses while makinga adequate profit.

Q2) The impact of adverse selection upon certain types of insurance include -

1. Life and medical insurance - As the individual works in a high-risk environment or is a smoker, it is more likely that he/she purchases life or medical insurance.

2. Vehicle insurance- Number of thefts or accidents in a certain area increases the probabilty of purchasing insurance.