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  • Lect03 - 1 - Insurance Fundamentals

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    mariana
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    Risk pooling is the fundamental principle of insurance where collecting payments from a large group reduces the risk for any individual policyholder. Moral hazard and selection bias are issues addressed through risk mitigation techniques like deductibles, coinsurance, and mandatory coverage. The law of large numbers demonstrates that with more policyholders, the variance in claims across the pool decreases.

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    Lect03_1_Insurance Fundamentals

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    Risk pooling is the fundamental principle of insurance where collecting payments from a large group reduces the risk for any individual policyholder. Moral hazard and selection bias are issues addressed through risk mitigation techniques like deductibles, coinsurance, and mandatory coverage. The law of large numbers demonstrates that with more policyholders, the variance in claims across the pool decreases.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    9 views2 pages

    Lect03 - 1 - Insurance Fundamentals

    Uploaded by

    mariana
    Risk pooling is the fundamental principle of insurance where collecting payments from a large group reduces the risk for any individual policyholder. Moral hazard and selection bias are issues addressed through risk mitigation techniques like deductibles, coinsurance, and mandatory coverage. The law of large numbers demonstrates that with more policyholders, the variance in claims across the pool decreases.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    Fundamental Insurance Principles and Issues

    • Risk Pooling is the source of all value in insurance


    • Moral Hazard dealt with partially by deductions and co-
    insurance
    • Selection Bias dealt with by group policies, by testing and
    referrals, and by mandatory government insurance
    Risk Pooling
    • If n policies, each has independent probability p of a claim,
    then the number of claims follows the binomial
    distribution. The standard deviation of the fraction of
    policies that result in a claim is

    • Law of large numbers: as n gets large, standard deviation


    approaches zero

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