What is the reason the law of large numbers is necessary for insurance quizlet?

· Personal-is insurance that is purchased by individuals and families for their risk needs.

· Group- insurance provided by the employer for the benefit of employees.

· Commercial- Property/casualty insurance for businesses and other organization.

· Life/Health- Insurance that covers exposures to the perils of death, medical expenses, disability, and old age.

· Property/Casualty- Insurance that covers property exposures such as direct and indirect losses of property caused by perils such as fire, windstorm, and theft

· Private or Government- Insurance is provided both by privately owned organizations and by state and federal agencies. Measured by premium income, the bulk of property/casualty insurance is provided by private insurers.

· Voluntary or Involuntary- Most private insurance is purchased voluntarily, although some types, such as automobile insurance or insurance on mortgages and car loans, are required by law or contracts. In many states, the purchase of automobile liability insurance is mandatory, and if the car is financed, the lender requires property damage coverage.

When top managers of a mutual company decide they need to raise capital, they may go through a process called demutualization. A mutual company undergoes the process of demutualization to convert into a stock company.
In the last decade, there was an increase in the number of companies that decided to demutualize and become stock companies. Policyholders, who were owners of the mutual company, received shares in the stock company. Part of the motive was to provide top management with an additional avenue of income in the form of stock options in the company. The demutualization wave in the life insurance industry reached its peak in December 2001, when the large mutual insurer, Prudential, converted to a stock company. The decade between the mid-1990s and mid-2000s saw the demutualization of twenty-two life insurance companies: Unum, Equitable Life, Guarantee Mutual, State Mutual (First American Financial Life), Farm Family, Mutual of New York, Standard Insurance, Manulife, Mutual Life of Canada (Clarica), Canada Life, Industrial Alliance, John Hancock, Metropolitan Life, Sun Life of Canada, Central Life Assurance (AmerUs), Indianapolis Life, Phoenix Home Life, Principal Mutual, Anthem Life, Provident Mutual, Prudential, and General American Mutual Holding Company (which was sold to MetLife through its liquidation by the Missouri Department of Insurance).

Professor Kulp was simply calling attention to the fact that how well insurance works as a method of handling risks depends upon the extent to which a risk meets the ideal requisites for insurability. If it meets all of these requisites, insurance will work well. If it meets some requisites but not others, insurance may work to some extent. Insurance against loss caused by sickness, for example, is difficult because sickness may be hard to identify. If I, as the insured, say I am sick and cannot work, you, as the insurer, may find it difficult to prove that I am wrong. On the other hand, insurance to cover the loss caused by a broken leg is easier to deal with because whether or not I have a broken leg can be objectively determined. There are some risks, of course, that fail to meet so many of the requisites for insurability that insurance won't work at all. The nuclear power plant risk is almost uninsurable for this reason. Probability of loss is difficult to calculate, there are not a large number of similar exposure units, and a catastrophic loss could occur.

· Personal-is insurance that is purchased by individuals and families for their risk needs.

· Group- insurance provided by the employer for the benefit of employees.

· Commercial- Property/casualty insurance for businesses and other organization.

· Life/Health- Insurance that covers exposures to the perils of death, medical expenses, disability, and old age.

· Property/Casualty- Insurance that covers property exposures such as direct and indirect losses of property caused by perils such as fire, windstorm, and theft

· Private or Government- Insurance is provided both by privately owned organizations and by state and federal agencies. Measured by premium income, the bulk of property/casualty insurance is provided by private insurers.

· Voluntary or Involuntary- Most private insurance is purchased voluntarily, although some types, such as automobile insurance or insurance on mortgages and car loans, are required by law or contracts. In many states, the purchase of automobile liability insurance is mandatory, and if the car is financed, the lender requires property damage coverage.

a. If you expect to have only three losses per year on average (frequency) for a total of $10,000 each loss (severity), what will be the cost of sharing these losses per student in the class?

The total amount of loss each year = $10,000 * 3 = $30,000
The number of students in the class = 160
Therefore,
The cost of sharing of loss per student = $30,000/160 = $187.5
Since the class has 160 students, you will try to convince the students to share only the losses that already occurred. If you are Jack, you will suggest to the students that it will cost each student only $187.5 a year based on the losses last year - much less than buying auto insurance in the open market. When students object by saying that some cars are more expensive than others and should be charged more, Jack may explain, that this experiment would not emulate an insurance company. The system will only assess the participants an equal amount of losses at the end of the year.

b. Do you think you have enough exposures to predict only three losses a year? Explain.

Because there needs to be a large number of exposures to truly be able to have accurate prediction of losses, the size of the class would not be large enough. With inability to have more certainty about the prediction of losses, it is likely that one catastrophic year such as a year with 30 losses and a cost of $1,875 per student would not work and collection would be impossible.

Reinsurance may be divided into three types: (1) treaty, (2) facultative, and (3) a combination of these two. Each of these types may be further classified as proportional or nonproportional.

In treaty insurance, the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance. Examples of classes covered by treaty reinsurance are all property insurance policies or all casualty insurance policies written by the reinsured.

In a facultative arrangement, both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract e.g. facultative reinsurance agreements often cover catastrophic or unusual risk exposures.

When the reinsurance agreement calls for proportional (pro rata) reinsurance, the reinsurer assumes a prespecified percentage of both premiums and losses. Expenses are also shared in accord with this prespecified percentage. For example, if the reinsured pays 40 percent of the premiums to the reinsurer, then the reinsured recovers 40 percent of its losses when it pays the original policyholder according to the original policy terms. The reinsured can only recover a portion of its total loss, not the entire amount.

Nonproportional reinsurance obligates the reinsurer to pay losses when they exceed a designated threshold. For example, an insurer is prepared to accept a loss of $1 million and he (she) purchases a layer of reinsurance of $4 million in excess of $1 million. If a loss of $3 million occurs, then the insurer will retain $1 million and will recover $2 million from its reinsurer. In this example, the reinsured will retain losses exceeding $5 million unless he (she) has purchased a further excess layer of, let's say, $10 million in excess of $5 million.

a. The primary responsibility of marketing is to sell and renew insurance policies. Underwriting is the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate. An underwriter decides whether to insure exposures on which applications for insurance are submitted.
Underwriting tends to make the marketing of an insurance policy more difficult, which might create an adversarial relationship between the two entities.

b. Underwriting is the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate. An underwriter decides whether to insure exposures on which applications for insurance are submitted.
Actuarial analysis is a highly specialized mathematic analysis that deals with the financial and risk aspects of insurance. Actuarial analysis takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge.
Actuarial must bring data collection, measurement, estimating, forecasting, and valuation tools to provide financial and underwriting data for management to assess marketing opportunities and the degree of risk taking that is required.

c. Underwriting is the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate. An underwriter decides whether to insure exposures on which applications for insurance are submitted.
Actuarial analysis is a highly specialized mathematic analysis that deals with the financial and risk aspects of insurance. Actuarial analysis takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge.
Actuarial must bring data collection, measurement, estimating, forecasting, and valuation tools to provide financial and underwriting data for management to assess marketing opportunities and the degree of risk taking that is required.

d. Underwriting activities must be legal i.e. they have to follow the laws with prohibit discrimination on certain grounds during the underwriting process. For example, The Health Insurance Portability and Accountability Act of 1996 (HIPAA) places limits on underwriting activity that involves the use of health factors to discriminate against individual plan participants with health issues.

e. The marketing department concentrates on selling and renewing insurance policies. These activities are conducted by the agents and broker. While agents generally represent the insurer, brokers represent the insureds.
Providing after-sales services is an integral part of marketing. Brokers, who represent insureds, may provide claims-services to insureds, i.e. help the insureds file claims and receive compensation in case of losses.

f. Claims adjusting is the process of paying insureds after they sustain losses. An actuary helps determine the probability of these claims and the amount of reserves required to be maintained by the insurer for payment of these claims.

What is the reason the law of large numbers is necessary for insurance?

What is the law of large numbers in insurance quizlet?

What is the law of large numbers in insurance theory?

What element of insurance uses the law of large numbers to reduce the possibility of missing future loss predictions?