HW 2 - Also, the people most prone to floods and...

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Math 422 Chapter 2: 1,2,3,6,9,11 disc 3 1 2. Because a loss should be undesirable, even after the insurance payout. In the case of gambling, the premium would have to be greater than the payout to enforce this. Also the point of gambling is to take on risk. It wouldn’t be gambling with insurance covering losses. 3. Loss of specific items is harder to insure because it’s difficult to put an exact value on them. Jewelry and coats can be customized based on the person, and without a large group of similar items it may be difficult to insure for an exact value. 6. Floods and earthquakes are difficult to insure due to their catastrophic effect and adverse selection. When floods and earthquakes do strike, they usually hit a very large area at once making the damage very expensive.
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Unformatted text preview: Also, the people most prone to floods and earthquakes are most likely to buy insurance. 9. In conditions with adverse selection, the people most prone to accident are most likely to buy insurance. This raises the incident of accident also raising the premium, so all the low risk users end up paying much more for risk that isnt theirs, subsidizing the others. 11. Separation and Class Homogeneity Grouping people with similar risks together Reliability the insurance used to classify individuals must be reliable. Incentive value Rewarding good insured and those that minimize risks with better rates. Social Acceptability It must be socially acceptable to classify based on the criteria....
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This note was uploaded on 04/10/2008 for the course MATH 422 taught by Professor Huntington during the Winter '08 term at University of Michigan.

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