FIN 3660 NAME ______________________________
Assignment 1.
1. What is the Law of Large Numbers, and how does it affect insurers?
2. A. How does pure risk differ from speculative risk?
B. How does a valued policy differ from a contract of indemnity?
3. Individuals and businesses often use risk management as a means of identifying and assessing financial risks. To eliminate or reduce exposure to a specific financial risk, an individual can use at least one of four risk management techniques: avoid the risk, control the risk, transfer the risk, or accept the risk.
Please briefly discuss each of these four techniques and provide an example of how you could personally use each method.
A. Avoiding risk:
B. Controlling risk:
C. Transferring risk:
D. Accepting Risk:
4. Briefly explain the risk management technique used in each of the following situations:
(1) Michaela insists that all passengers riding in her automobile wear seat belts at all times.
(2) Michael, a self-employed graphic design artist, purchased a disability income insurance policy that will provide him with monthly income benefits if he becomes totally disabled.
(3) Because he is concerned about suffering neck and back injuries, Mickey never rides roller coasters at amusement parks.
(4) After purchasing a new computer, Minnie rejected the manufacturer's offer of an extended warranty on the new computer system.
5. Define adverse selection/antiselection, and provide an example of how adverse selection could be detrimental to the success of the process of having a successful insurance pool: