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- An actuary says, “Global warming leads to unprecedented heavy rainfalls in the North East State. The infrastructure, however, is not yet prepared to cope with the flash flooding problems. Our current home insurance policies do not differentiate the
An actuary says, “Global warming leads to unprecedented heavy rainfalls in the North East State. The infrastructure, however, is not yet prepared to cope with the flash flooding problems. Our current home insurance policies do not differentiate the
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Title: Part I: Insurance Questions
Contents
1. An actuary says, “Global warming leads to unprecedented heavy rainfalls in the North East State. The infrastructure, however, is not yet prepared to cope with the flash flooding problems. Our current home insurance policies do not differentiate the premium across the states. We should charge higher premium for the homeowners in the North East State, in order to adjust for the higher flooding risks.”
Do you agree with the premium differentiation? If you agree, discuss the potential problems that arise in the absence of the premium differentiation. Otherwise, explain why the premium differentiation is unnecessary.
2. An insurance agent says, “Insurance policies allow the policyholders to transfer their risks to insurance firms. The regulator, therefore, must restrain them from selling a policy to a number of individuals, in order to ensure the insolvency of insurance firms.” Do you agree?
3. An insurance broker says, “We have two alternative home insurance policies. The first policy indemnifies 80% of damages and requires $200 premium per annum. The other policy offers full coverage and requires $300 premium per annum. I recommend the first policy since it offers larger coverage per premium.” Do you agree?
4. Comprehensive Motor Vehicle (CMV) insurance policies indemnify the policyholder’s property damages when the party at fault does not have a liability insurance (i.e., the policy that covers the third party’s damage). A researcher says, “Mandating the liability insurance of drivers would enhance the demand for CMV insurance.” Do you agree?
5. Suppose that Wonderland is composed of four states: North, South, East, and West. Earthquakes, which cause catastrophic damages, occur only in South. A politician says, “Insurance policies must cover the damages from earthquakes. If insurance firms sell the same policy to the whole country, the policyholders in other states can subsidize those in South.”
Do you agree?
6. Tommy says, “In the absence of adverse selection problem, risk-averse individuals are willing to buy an insurance policy if it is offered at the fair premium.” Do you agree?
Total Number of Words: 913 (approximately 3 pages)
Contents
1. An actuary says, “Global warming leads to unprecedented heavy rainfalls in the North East State. The infrastructure, however, is not yet prepared to cope with the flash flooding problems. Our current home insurance policies do not differentiate the premium across the states. We should charge higher premium for the homeowners in the North East State, in order to adjust for the higher flooding risks.”
Do you agree with the premium differentiation? If you agree, discuss the potential problems that arise in the absence of the premium differentiation. Otherwise, explain why the premium differentiation is unnecessary.
2. An insurance agent says, “Insurance policies allow the policyholders to transfer their risks to insurance firms. The regulator, therefore, must restrain them from selling a policy to a number of individuals, in order to ensure the insolvency of insurance firms.” Do you agree?
3. An insurance broker says, “We have two alternative home insurance policies. The first policy indemnifies 80% of damages and requires $200 premium per annum. The other policy offers full coverage and requires $300 premium per annum. I recommend the first policy since it offers larger coverage per premium.” Do you agree?
4. Comprehensive Motor Vehicle (CMV) insurance policies indemnify the policyholder’s property damages when the party at fault does not have a liability insurance (i.e., the policy that covers the third party’s damage). A researcher says, “Mandating the liability insurance of drivers would enhance the demand for CMV insurance.” Do you agree?
5. Suppose that Wonderland is composed of four states: North, South, East, and West. Earthquakes, which cause catastrophic damages, occur only in South. A politician says, “Insurance policies must cover the damages from earthquakes. If insurance firms sell the same policy to the whole country, the policyholders in other states can subsidize those in South.”
Do you agree?
6. Tommy says, “In the absence of adverse selection problem, risk-averse individuals are willing to buy an insurance policy if it is offered at the fair premium.” Do you agree?
Total Number of Words: 913 (approximately 3 pages)