Microeconomics · free preview
Insurance and the Price of Risk
Pooling turns lumpy individual losses into a smooth average by the law of large numbers, premiums cover expected loss plus load, and the information module's failures live inside the pricing.
1. The pooling miracle
The pooling miracle
2. Building a premium
Building a premium
3. What insurance cannot be
What insurance cannot be
4. The behavioral bridge
The behavioral bridge
5. Pooling
Why can an insurer predict its total payouts accurately while no homeowner can predict her own loss?
6. Premium structure
A policy has a 2 percent chance of a 50 thousand dollar loss per year, and the insurer's load adds 300 dollars. What does the premium approximate?
7. The expected loss
A boat has a 3 percent chance per year of a 40 thousand dollar total loss. Compute the annual expected loss in dollars, and write the number.
8. The pool's arithmetic
Why can an insurer predict its total payouts accurately while no single homeowner can predict hers?
9. What loads the premium
A policy's premium exceeds the expected payout. What explains the markup?
10. A rarer, smaller boat loss
A boat has a 5 percent chance per year of a 20 thousand dollar total loss. Compute the annual expected loss in dollars, and write the number.
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