NGPF Activity Bank

Insurance

ANALYZE: Should I Insure This Group of People?

[Answer Key]
THREE QUESTIONS INSURANCE COMPANIES ASK THEMSELVES:

1. Is there a large, diverse pool of people to insure?

a. Based on age, gender, health, location, occupation, etc.

2. Is there a way to gather accurate data?

a. To determine the probability of each insured needing to collect their benefits

3. Is it possible to charge/collect enough premium payments to cover expected losses?

a. This can be done by calculating two things:
i. Total Revenue = (Total # of insured) x (Premium amount)
ii. Total Projected Costs = (Total # of claims) x (Cost per claim)

You are an underwriter at Smart Insurance Inc., which specializes in custom insurance agreements. Groups of people
come to you requesting insurance, and you must evaluate whether it would be smart for the company to provide
insurance to this group of people.

Read each scenario below and evaluate the three questions from above. Whether each question is True or False, make
sure to explain your answer (i.e. If there is a way to gather accurate data, what is it? And if there isn’t, why not?)

Scenario 1:
A group of 1,000 farmers is looking for insurance to protect their crops against insects. Here are the details:

● The farmers come from 10 different states across the Midwest and South.
● The groups range from farming families who’ve been in business for generations to new farmers, and farmers
with hundreds of acres of lands to just a few acres.
● Each year, the farmers lose an average of 12% of their crops, due to variety of factors, including drought, fire,
insects, animals, and other factors. No data is available breaking down the specific crop loss to each factor.
● Every farmer has agreed to pay their premium in full at the beginning of the year, or accept that they will not
be covered.
● Total Revenue Projection = (1,000 farmers) x ($1,000 premium/year)
● Total Projected Costs = Last year, the farmers’ projected revenue was $10,000,000. However, 12% of crops
were lost. All those farmers would have filed insurance claims to recover those losses.

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 1. Is there a large, diverse pool of people to insure (based on age, gender, health, location, occupation, etc.)?
Yes, the farmers come from different states, and have a variety of experience and farm size.

2. Is there a way to gather accurate data to determine the probability of each insured needing to collect their benefits?
No, there is no data available to break down the specific crop loss to each factor: drought, fire, insects, animals, etc.
so it would be difficult to gather this data.

3. Is it possible to charge/collect enough premium payments to cover losses?

All farmers have agreed to pay their premium in full at the beginning of the year: 1,000 farmers x $1,000 =
$1,000,000. If 12% of crops failed last year, then 12% of 10M means $1,200,000 total lost. Smart Insurance would
still be short $200,000. This means that the premium payments do not cover their losses.

Scenario 2:
A group of 100 business owners in the downtown of major city is looking for insurance to protect against burglary and
vandalism. Here are the details:
● All the businesses are located with three square blocks of one another, and all of them are either corner
grocery or convenience stores.
● The rate of burglary and vandalism in the city is one per week. The rate of burglary and vandalism in the
neighborhood of the businesses is one per day.
● Police have records of every burglary and vandalism case for the past five years; the average cost for a
business owner is $500/incident.
● Total Revenue Projection = (100 business owners) x ($1,000 premium/year)
● Total Projected Costs = (365 incidents/year) x ($500/incident)

1. Is there a large, diverse pool of people to insure (based on age, gender, health, location, occupation, etc.)?
NO. The grocery stores are in such a small area (three blocks) that there could easily be enormous spikes in claims
based on a single string of burglaries.

2. Is there a way to gather accurate data to determine the probability of each insured needing to collect their benefits?
Yes, police have records dating back five years for every incident.

3. Is it possible to charge/collect enough premium payments to cover losses?

No. Revenue is projected at $100,000 (100 x$1,000) and costs are projected at $182,500 (365 x $500).

Scenario 3:
5,000 firefighters in one county are requesting insurance to pay their family's’ living expenses in the event they die
while on the job. Here are the details:
● The county has a mixture of urban and rural areas, and the fire department has employees of all ages and
general health.
● Every work-related death for the past 25 years has been recorded, as well as the subsequent living expenses
for the surviving family members. There have been 5 deaths, with each family receiving an average of
$1,000,000 in benefits
● Total Revenue Projection = (5,000 firefighters) x ($100 premium/year)
● Total Projected Costs = (1 death every five years) x ($1,000,000/death)

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 1. Is there a large, diverse pool of people to insure (based on age, gender, health, location, occupation, etc.)?
Yes, the firefighters come from a variety of locations, and have varied ages and health.

2. Is there a way to gather accurate data to determine the probability of each insured needing to collect their benefits?
Yes, all work-related deaths have been recorded for 25 years.

3. Is it possible to charge/collect enough premium payments to cover losses?

Yes, the yearly revenue projection is is $500,000. While the cost per death is $1,000,000, the projected cost per year
is $200,000 because one only happens every five years.

Scenario 4:
There are 50 college students all about to take the LSAT (the test required to get into law school) looking to get
insurance to pay for an intensive study preparation class in case they don’t get a good enough score and need to
retake the test. Here are the details:
● To get into a top 25 school, you need a score of a 160. Any student who gets below a 160 will retake the test
and get their $200 test preparation course paid for.
● 50 college students, of varying backgrounds, gender and location, have informally agreed to pool the risk to
pay for prep classes to do better a second time (if they get below a 160).
● They’ve agreed via a Facebook group to electronically pay $20 for their premium; however, only 35% have
actually made their payments.
● For the past 20 years, 80% of students have gotten a 160 or better on their first try.
● Total Revenue Projection = (50 students) x ($20 premium)
● Total Projected Cost = (20% get below a 160) x ($200 course cost)

1. Is there a large, diverse pool of people to insure (based on age, gender, health, location, occupation, etc.)?
Yes, the students have varied backgrounds, gender and locations.

2. Is there a way to gather accurate data to determine the probability of each insured needing to collect their benefits?
Yes, there is data going back 20 years that provides a pretty accurate picture of mean test scores.

3. Is it possible to charge/collect enough premium payments to cover losses?

NO. Only 35% of students have paid and there is really no way to ensure that the rest of the group will pay.

Scenario 5:
A shipping company, Trans-Ocean Movers (T-OM), is looking to insure every container they ship so they can be
replaced in the event that it is lost or damaged. Here are the details:
● T-OM ships 100,000 containers per year, going to every major port in the world, and moving all types of cargo.
● Over the past 10 years, T-OM loses 1% of its containers and another 1% are damaged.
● T-OM already has an insurance policy that covers the contents within every container. This policy would be for
the containers themselves.
● A new container costs $500.
● Total Revenue Projection = (100,000 containers) x ($10 premium/container)
● Total Projected Costs = (2% containers lost/damaged each year) x ($500/container)

1. Is there a large, diverse pool of people to insure (based on age, gender, health, location, occupation, etc.)?

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 Yes, the cargo travels all around the world and contains all types of items.
2. Is there a way to gather accurate data to determine the probability of each insured needing to collect their benefits?
Yes, there is data going back 10 years that is accurate.

3. Is it possible to charge/collect enough premium payments to cover losses?

Yes. There is $1,000,000 in projected revenue. There is $1,000,000 in projected costs (2,000 containers x $500).

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