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Chapter 16: Q. 9 (page 398)

What is an insurance premium?

Short Answer

Expert verified

The insurance premium is the sum paid to the insurance firms that provide such protection in the form of insurance to such persons in exchange for protection against any risk.

Step by step solution

01

Definition of insurance.

Insurance is an agreement in which a person or a company gets insurance cover or reimbursement in the form of a coverage from an insurance company.

02

Explanation of solution.

Insurance is a tool that individuals and businesses use to protect themselves from the financial consequences of a single occurrence. Households and businesses will pay premiums in regular installments or payments. . Insurance firms base premiums on the likelihood of negative financial consequences occurring or not occurring.

The group of people who will incur a loss as a result of such negative financial consequences will be compensated for their insurance premium.

There are various types of insurance available on the market, such as health insurance for medical relief, car insurance to protect against accidents or theft, home insurance to protect property rights, fire insurance to protect against loss due to fire, and so on.

As a result, the premium is a regular or little amount that households or businesses must pay in order to be protected from major financial consequences.

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Most popular questions from this chapter

Imagine that you can divide 50-year-old men into two groups: those who have a family history of cancer and those who do not. For the purposes of this example, say that 20% of a group of 1,000 men have a family history of cancer, and these men have one chance in 50 of dying in the next year, while the other 80% of men have one chance in 200 of dying in the next year. The insurance company is selling a policy that will pay $100,000 to the estate of anyone who dies in the next year.

(a) If the insurance company were selling life insurance separately to each group, what would be the actuarially fair premium for each group?

(b) If an insurance company were offering life insurance to the entire group, but could not find out about family cancer histories, what would be the actuarially fair premium for the group as a whole?

(c) What will happen to the insurance company if it tries to charge the actuarially fair premium to the group as a whole rather than to each group separately?

Why might it be difficult for a buyer and seller to

agree on a price when imperfect information exists?

What is an actuarially fair insurance policy?

What are some ways a seller of goods might reassure a possible buyer who is faced with imperfect information?

What are some ways that someone looking for a loan might reassure a bank that is faced with imperfect information about whether the borrower will repay the loan?
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