Private and Social insurance

Question 1

Define OBJECTIVE and METHOD of Insurance

Answer 1

• Objective: Insurance as device which offers individuals protection against risk;
• Method: As actuarial mechanism by which objective may be pursued.

Question 2

Demand side of Insurance. Why buy it?

Answer 2

• Income flutuations
• Uncertainty causes disutility
• Risk aversiveness

Question 3

What is the solution of insecurity for INDIVIDUAL and COLLECTIVE?

Answer 3

➢Individual: savings and insurance;
➢Collective: communities implementing solidarity programs and state providing support
(assistance) and social insurance

Question 4

Probablities must be:

Answer 4

independent
less than one
known or estimatable

Question 5

What are the conditions for private (actuarial) insurance?

Answer 5

Positive demand
Technical possibility to supply insurance
Demand price must exceed or equal the net supply price

Question 6

What are the problems of private (actuarial) insurance?

Answer 6

Imperfectly informed consumers (hidden/ forgotten details, technicality, gaps)
High administrative cost (marketing, processing, reimbursement, economies of scale)

Question 7

Why insurance from social risks is compulsory?

Answer 7

Lacking long-term vision
Selfishness

Question 8

Social insurance benefits

Answer 8

Response to market failures
Has no costs, may be more efficient
2 sources (un-/employment, more information)
Cover more areas (unemployment, inflation, medical risks)
Almost compulsary

Question 9

Similarities between Private and Social insurances

Answer 9

Insurance only from certain risks
Benefit are only paid when something happens
All pay for the service, even though some do not use it
Benefits are related to payment of contribution

Question 10

Differences between Private and Social insurances (5)

Answer 10

Social insurance:
is wider;
provides more protection than private;
covers not only risk but uncertainty;
does not have strict contracts, since only laws can change that;
subsidized from state budget;
In Social insurance contributions do not equal benefits

Question 11

Compulsory nature of social insurance

Answer 11

Less costly protection per insured;
Possibility of granting special treatment to categories of disadvantaged members;
Horizontal redistributions: from the “non-damaged” to the “damaged”;
Vertical redistribution: from higher to lower incomes.