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12 Exercise

This document discusses key concepts related to insurance companies. It asks questions about why people buy insurance, why insurance companies don't allow unrelated risks to be insured, and what information asymmetry is and how it affects insurers. It also distinguishes between adverse selection and moral hazard, and how insurers protect against losses from these. Finally, it includes two quantitative questions about contributions to a pension plan and calculating out-of-pocket costs after an accident.

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225 views1 page

12 Exercise

This document discusses key concepts related to insurance companies. It asks questions about why people buy insurance, why insurance companies don't allow unrelated risks to be insured, and what information asymmetry is and how it affects insurers. It also distinguishes between adverse selection and moral hazard, and how insurers protect against losses from these. Finally, it includes two quantitative questions about contributions to a pension plan and calculating out-of-pocket costs after an accident.

Uploaded by

kc103038
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Topic 12 Insurance Companies

Questions

1. Why do people choose to buy insurance even if their expected loss is less than the payments
they will make to the insurance company?
2. Why do insurance companies not allow people to buy insurance on personally unrelated
risks?
3. What is information asymmetry, and how does it affect insurance companies?
4. Distinguish between adverse selection and moral hazard as they relate to the insurance
industry.
5. How do insurance companies protect themselves against losses due to adverse selection
and moral hazard?

8. How are insurance companies able to predict their losses from claims accurately enough to
let them price their policies such that they will make a profit?

Quantitative Questions:

8. An employee contributes $200 a year (at the end of the year) to her pension plan. What
would be the total contributions and value of the account after five years? Assume that the
plan earns 15% per year over the period.

9. Pauls car slid off the icy road, causing $2,500 in damage to his car. He was also treated for
minor injuries, costing $1,300. His car insurance has a $500 deductible, after which the full
loss is paid. His health insurance has a $100 deductible and covers 75% of medical cost
(total). What were Pauls out-of-pocket costs from the incident?

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