Tutorial 2
Review Questions
Question 1
a. What is the definition of insurance?
b. From the definition, identify four basic characteristics of insurance.
Question 2
Explain the law of large numbers.
Question 3
Pure risks ideally should have certain characteristics to be insurable by private insurers. List the six characteristics of an ideally insurable risk.
Question 4
Identify the approaches that insurers can use to deal with the problem of catastrophic loss exposures.
Question 5
Why are most market risks, financial risks, production risks, and political risks considered difficult to insure by private insurers? Question 6
a. What is the meaning of adverse selection?
b. Identify some methods that insurers use to control for adverse selection.
Question 7
a. Explain how insurance can provide benefits to the community. b. Explain how insurance can be costly to society.
Question 8
What are the two major differences between insurance and hedging?
Question 9
Why does non-life insurance typically use the term ¡®property and casualty insurance¡¯ rather than ¡®property and liability insurance¡¯?
Question 10
a. Explain the basic characteristics of social insurance programs. b. Identify the major social insurance programs in the United States.
Case Studies
Question 1
There are numerous definitions of insurance. Based on the definition of insurance stated in the text, indicate whether each of the following guarantees is considered insurance.
a. A new television is guaranteed by the manufacturer against defects for 90 days.
b. A new set of radial tires is guaranteed by the manufacturer against road defects for 50,000 miles.
c. A builder of new homes gives a 10-year guarantee against structural defects in the home.
d. A cosigner of a note agrees to pay the loan balance if the original debtor defaults on the payments.
e. A large group of homeowners agrees to pay for losses to homes that are damaged or destroyed by fire during the year. Application Questions
Question 1
Compare the risks of (i) fire with (ii) war in terms of how well they meet the requirements of an ideally insurable risk. Question 2
a. Private insurers provide social and economic benefits to society. Explain the following benefits of insurance to society. (1) Indemnification for loss
(2) Enhancement of credit
(3) Source of funds for capital investment and accumulation
b. Explain the major costs of insurance to society.
Question 3
Buildings in flood zones are difficult to insure by private insurers because the ideal requirements of an insurable risk are difficult to meet.
a. Identify the ideal requirements of an insurable risk.
b. Which of the requirements of an insurable risk are not met by the flood peril?
Question 4
Private insurance provides numerous coverage that can be used to meet specific loss situations. For each of the following situations, identify a private insurance coverage that would provide the desired protection.
a. Emily, age 28, is a single parent with two independent children. She wants to make certain that funds are available for her children¡¯s education if she dies before her youngest child finishes college.
b. Danielle, age 16, recently obtained her driver¡¯s license. Her parents want to make certain they are protected if Danielle negligently injures another motorist while driving a family car. c. Jacob, age 30, is married with two dependents. He wants his income to continue if he becomes totally disabled and unable to work.
d. Tyler, age 35, recently purchased a house for $200,000 that is located in an area where tornadoes frequently occur. He wants to certain that funds are available if the house is damaged or destroyed by a tornado.
e. Nathan, age 40, owns an upscale furniture store. Nathan wants to be protected if a customer is injured while shopping in the store and sues him for the bodily injury.
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