A1. ASOP 12 Risk Classification Flashcards
1
Q
3 mechanisms for coping with risk
A
- Hazard avoidance ( or reduction):
- not all risks can be avoided - Transfer:
- government assistance, self insurance groups, private insurance - Public and private Insurance Programs
2
Q
3 means of establishing a fair price
A
- Reliance on wisdom, good judgment:
- Ignores actual experience,valuable information is lost - Observe the risk’s actual losses over extended time:
- Loss event may only occur once => life insurance
- Gradual changes in hazard may render past information useless - Observe groups of risks with similar characteristics:
- Identification of similar risk characteristics before the observation period is problematic
3
Q
What is adverse selection
A
- buyers are free to select among different sellers
- sellers react by offering a similar product at a price not matching its cost
4
Q
2 methods for controlling adverse selection
A
- risk classification in a voluntary market
- charges each risk an appropriate rate through proper risk classification
- balances the economic forces governing buyer and sellers - Compulsory insurance with limited choice
- restriction of buyer freedom prevents adverse selection
5
Q
Similiarities/differences between government (public) and private insurance program
A
Similarities:
- Pooling of risks
- Pools should be large enough to guarantee reasonable predictability of total losses
Differences:
- Public is provided by law, private is provided by contract
- Public is usually compulsory, private is mostly voluntary
- Public has little role for competition, private relies on competition
- Public does not need to be self-supporting => has little relation between benefits and costs (insure “uninsurable” risks), private must support itself => relate benefits to costs
6
Q
Needs in communication/documentation
A
- significant assumption made
- deviation from traditional practice
- data limitations
