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Questions and Answers
Questions and Answers
What is the definition of insurance according to Vaughan E. and Vaughan?
What is the definition of insurance according to Vaughan E. and Vaughan?
- An economic device substituting large certain cost for a small uncertain financial loss
- An economic device substituting small certain cost for a large uncertain financial loss (correct)
- An economic device substituting small certain cost for a small uncertain financial loss
- An economic device substituting large certain cost for a large uncertain financial loss
What is the concept of Adverse Selection in insurance?
What is the concept of Adverse Selection in insurance?
- It refers to the tendency of high-risk individuals getting more insurance coverage (correct)
- It refers to the tendency of high-risk individuals avoiding insurance coverage
- It refers to the tendency of low-risk individuals avoiding insurance coverage
- It refers to the tendency of low-risk individuals getting more insurance coverage
How can insurance be compared to gambling?
How can insurance be compared to gambling?
- Both involve the risk of losing money based on uncertain outcomes (correct)
- Insurance is riskier than gambling
- Gambling is riskier than insurance
- Insurance guarantees a return, while gambling does not
What are the requirements of risk to be insurable?
What are the requirements of risk to be insurable?
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What is the difference between private insurance and social insurance?
What is the difference between private insurance and social insurance?
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What is the definition of insurance according to Vaughan E. and Vaughan?
What is the definition of insurance according to Vaughan E. and Vaughan?
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How can insurance be compared to gambling?
How can insurance be compared to gambling?
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What are the benefits of insurance?
What are the benefits of insurance?
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Define Reinsurance, and then indicate its benefits and its types in detail.
Define Reinsurance, and then indicate its benefits and its types in detail.
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Explain the comparison between Insurance and Hedging
Explain the comparison between Insurance and Hedging
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Questions and Answers
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Study Notes
Study Notes
Definition of Insurance
- Insurance is a contractual agreement where individuals or entities receive financial protection against potential future losses in exchange for a premium payment.
- Vaughan E. and Vaughan emphasize the shared risk among participants to safeguard against unforeseen events affecting financial stability.
Adverse Selection in Insurance
- Adverse selection occurs when individuals with higher risk of loss are more likely to seek insurance coverage, leading to an imbalance in the risk pool.
- Insurers may face losses if they cannot accurately assess the risk presented by applicants, resulting in higher premiums or limited coverage.
Comparison of Insurance to Gambling
- Insurance mitigates financial risk by providing compensation for losses, while gambling involves risking money on uncertain outcomes for potential gain.
- In insurance, the collective pooling of funds spreads risk across many policyholders, contrasting with gambling where individual bets are isolated and do not influence others.
Requirements for Insurable Risk
- The risk must be quantifiable and measurable, allowing for calculated premium rates.
- The event must be uncertain and not a result of intentional actions, ensuring randomness.
- Risks should be part of a large enough pool to allow for predictable loss distribution.
Private Insurance vs. Social Insurance
- Private insurance is provided by for-profit companies and motivated by profit, offering tailored plans to individuals or businesses.
- Social insurance is government-sponsored, aimed at protecting citizens through mandatory contributions and providing benefits for critical needs such as healthcare and unemployment.
Benefits of Insurance
- Insurance provides financial security, offering peace of mind by protecting against significant potential losses.
- It promotes risk-sharing among a large group, making it easier for individuals to manage unexpected financial burdens.
- Insurance can also encourage economic stability by ensuring individuals and businesses recover from unforeseen events.
Definition and Benefits of Reinsurance
- Reinsurance involves one insurance company transferring a portion of its risk to another insurer to reduce exposure to large losses.
- Benefits include improved financial stability for insurers, preservation of capital, and the ability to underwrite more policies by spreading risk.
- Types of reinsurance include treaty reinsurance (automatic coverage for defined risks) and facultative reinsurance (case-by-case coverage agreements).
Comparison Between Insurance and Hedging
- Insurance generally provides protection against specific risks, compensating losses after they occur.
- Hedging involves financial instruments to offset potential losses in investments or assets, offering a proactive approach to risk management.
- Both strategies aim to reduce exposure to financial uncertainties but through different methods and contexts.
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