chapter 8

Question 1

homogeneous risk pool

Answer 1

face the same probability distribution of losses

Question 2

insurance

Answer 2

a device that pools loss exposure of people into groups
funded by members’ payments to help pay for losses as they occur

Question 3

Why do firms purchase insurance

Answer 3

peace of mind, safety, protection of assets, security and increases credit worthiness

Question 4

insurance contract indemnification

Answer 4

insurer agrees to indemnify the insured in the event of a loss
to indemnify means to get you back to how you were before the loss

Question 5

3 types of indemnification

Answer 5

1. replace or repair asset
2. cash reimburstment
3. provide a service such as an attorney

Question 6

acv

Answer 6

actual cash value
the principle of idemnification makes sure that the insured doesn’t collect insurance more than what the loss is worth

Question 7

how to calculate acv

Answer 7

replacment cost - depreciation of item ( old age of car )

Question 8

purpose of acv

Answer 8

to control moral hazard -bc if they give more than what its worth people might do it on purpose

Question 9

violations to acv

Answer 9

life insurance- no cash value to someone’s life
rare items- one-of-a-kind art the ACV rule doesn’t apply because its based on how much its worth to someone

Question 10

loss premiums

Answer 10

money paid by people who has a loss and buys insurance

Question 11

no loss premium

Answer 11

money paid by people who has no loss