1
Q
When do pooling arrangements work best?
A
when the loss exposures are independent of one another. Correlated loss exposures can also benefit, as long as they are not perfectly postiively correlated
2
Q
How does pooling reduce risk?
A
through the sharing of losses and resources
3
Q
Differences between pooling and insurance
A
- Pooling is a risk-sharing mechanism, insurance is a risk transfer mechanism. Insurers cannot collect more premium from insureds if losses are higher than the premium, however, in pooling this can happen
4
Q
Benefits of insurance
A
- Pay for losses
- Manage CF uncertainty
- Comply with legal requirements
- Promote risk control activity
- Efficient use of insured’s resources - don’t need to save as much for potential losses as the burden is lifted by insurance
- Support Insured’s credit
- Source of investment funds
- Reduce social burden
5
Q
Characteristics of an ideally insurable loss
A
- Pure risk
- Fortuitous losses - eliminates moral hazards
- Define and measurable - definite in time, cause, and location
- Large number of similar exposures units
- Independent and not catastrophic
- Affordable
6
Q
What are the ways the government can be involved with insurance?
A
- Exclusive insurer
- Partner with private insurers
- Compete with private insurers
7
Q
Fortuitous loss
A
a loss that is accidental and unexpected
