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By the end of this section, you will be able to:

  • Explain how insurance works
  • Identify and evaluate various forms of government and social insurance
  • Discuss the problems caused by moral hazard and adverse selection
  • Analyze the impact of government regulation of insurance

Insurance is a method that households and firms use to prevent any single event from having a significant detrimental financial effect. Generally, households or firms with insurance make regular payments, called premiums . The insurance company prices these premiums based on the probability of certain events occurring among a pool of people. Members of the group who then suffer a specified bad experience receive payments from this pool of money.

Many people have several kinds of insurance: health insurance that pays when they receive medical care; car insurance that pays if they are the driver in an automobile accident; house or renter’s insurance that pays if possessions are stolen or damaged by fire; and life insurance, which pays for the family if the principal dies. [link] lists a set of insurance markets.

Some insurance markets
Type of Insurance Who Pays for It? It Pays Out When . . .
Health insurance Employers and individuals Medical expenses are incurred
Life insurance Employers and individuals Policyholder dies
Automobile insurance Individuals Car is damaged, stolen, or causes damage to others
Property and homeowner’s insurance Homeowners and renters Dwelling is damaged or burglarized
Liability insurance Firms and individuals An injury occurs for which you are partly responsible
Malpractice insurance Doctors, lawyers, and other professionals A poor quality of service is provided that causes harm to others

All insurance involves imperfect information in both an obvious way and in a deeper way. At an obvious level, future events cannot be predicted with certainty. For example, it cannot be known with certainty who will have a car accident, become ill, die, or have his home robbed in the next year. Imperfect information also applies to estimating the risk that something will happen to any individual. It is difficult for an insurance company to estimate the risk that, say, a particular 20-year-old male driver from New York City will have an accident, because even within that group, some drivers will drive more safely than others. Thus, adverse events occur out of a combination of people’s characteristics and choices that make the risks higher or lower and then the good or bad luck of what actually happens.

How insurance works

A simplified example of automobile insurance might work this way. Suppose that a group of 100 drivers can be divided into three groups. In a given year, 60 of those people have only a few door dings or chipped paint, which costs $100 each. Another 30 of the drivers have medium-sized accidents that cost an average of $1,000 in damages, and 10 of the drivers have large accidents that cost $15,000 in damages. For the moment, let’s imagine that at the beginning of any year, there is no way of identifying the drivers who are low-risk, medium-risk, or high-risk. The total damage incurred by car accidents in this group of 100 drivers will be $186,000, that is:

Questions & Answers

what is inflation
Sama Reply
different between demand and quantity demand
Farhan Reply
No difference
MansoorAfghan
demand is the overall demand for it
MansoorAfghan
actually theres no difference
MansoorAfghan
quantity demanded is used in Equilibrium of d and s
MansoorAfghan
for evrything else u use deman
MansoorAfghan
how to calculate inflation
Richard Reply
Explain the factors that have led to high quantity demanded
Ogwang Reply
price of the product increase of price substitute product as people shift to cheap one
Black
what are the methods used by trade union to increase wages of their members?
Black Reply
strike
Pearl
the size of the commodity
Mensah
increase demand of labour decrease supply of labour
Black
I do support your answer Jackel.
keshav
but how do they do it?
Black
by increasing more labour and reduced the suppliers
Mensah
they can not increase labour, they increase demand of labour.
Black
how do they increase demand for labor?
Black
by analyzing the market equilibrium , cost reduction and cost control , savings in time .
yash
decreasing supply of labour are achieved through training and certification that require for you to employed, you must have certificate, also trade union encouraged government to restrict migration into the country causing shortage of labour supply. Note that the aim of union is to enhance life
Black
objective of union: better working conditions, liveable wage, protect member from unfair treatment which are done through negotiations betweens representative and management. known as collective bargaining.
Black
what is the nature of economics?
Tyscar Reply
economics is a social science since it seeks to solve social problem of scarcity
Jamal
main concerns is the decision individuals make on the allocation of scarce resources among the competing wants
Black
in the short run firm produce a positive as long as the price is larger than what?
yoel Reply
what is economic
Bah Reply
economics is the study of managing the resources in order to maximize the needs and satisfy the wants to a great extent in a regulated set-up..
Muhammad
One explanation for deviation when there is no impact on balance of trade
Shaneel
economic s is a social science that deals with human behavior as a relationship between ends and scarce means which has alternative uses
Derokiz
economic is a study of mankind in ordinary business of life
FIDELIS
economics it is the study of social science that deals with human behaviour as relationship between ends and scarce means which have alternative uses
salam
what is diminishing returns
Blessed Reply
what is the difference between calculus linear equation and derivative?
Bti
whats inferior goods?
jaamac Reply
Good having low quality , also known as giffin goods. When income increases people shift to better quality goods . Hence having a negative effect on inferior goods rather than positive relation ( ie when income increases demand increases but not in case of inferior goods ) example wheat and bajra .
yash
What do u understand by the word ENDS in professor Lord L C Robinson definition of Economics?
Kaba Reply
I understand that ENDS is the unlimited needs of human. But we have limited resources to achieve our unlimited needs/wants. Thank you.
Midhun
variable is a factor that can change
nyodb Reply
did you understand definition of variablE
nyodb
what is monopoly
Shahid Reply
A market situation where there is a single seller of a product for the buyers.
harmony
monopoly is when you have a product in the market and only one supplier got this product so he starts rising price and dominate the market, cause this product doesn't have a competitor
Anas
A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute.
Jale
This is a kind of market that only one seller dominate the market without no competition of a y product or seller.
Ojo
what is production possibility curve?
Lisa
a production possibility curve is a diagram that shows two goods produced in an economy in such a way that increase in the production of one good cannot be done without the decrease on the production of the other. there are efficient points, inefficient points and unattainable points on the PPC
The
production possibility curve or frontier is useful analytical tool for illustrating the concepts of scarcity, choice and opportunity costs.
wilflay
The International Year of Soils, 2015 (IYS 2015) was declared by the Sixty-eighth session of the United Nations General Assembly on December 20th, 2013 after recognizing December 5th as World Soil Day.The purpose of the IYS is to raise awarenessworldwide of the importance of soils for food security,
what
what is indifference curve
Evet
Monopoly is the explicit right given to business or entrepreneurship by the government to operate as the only entity in the economy
wilflay
what is economic system ?
wilflay
economical matter solve this system is know as economic system
what
indifference curve is a diagram that shows the combination of only 2 commodities in such a way that each point on the indifference curve gives the same level of satisfaction
The
all consumer is equal consumtion as definite all ..that type curve is indifference curve
what
what is variable?
Rajeev
economic structure of any area is ,city or country is called economic system
Jairam
what is the difference between rational and irrational choice
Amina
help
Amina
Rational choice theory is an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the highest amount of personal utility. ... Most mainstream academic assumptions and theories are based on rational choice theory.
Anas
Irrationality is cognition, thinking, talking, or acting without inclusion of rationality. It is more specifically described as an action or opinion given through inadequate use of reason, or through emotional distress or cognitive deficiency.
Anas
help
Mensah
The meaning of inverse
Mensah
?
Anas
inverse what ? inverse means opposite .. like if ones going down other goes up so inverse relationship
MansoorAfghan
Definition of Inversely Related: Two variables are inversely related when an increase in one variable causes a reduction in the other variable. For example, when the price of a good increases, its quantity demanded decreases.
Anas
what is opotunity cost
salam
is an alternative forgone after the best choice have been selected.for example when you have cocacola and pepsi and you choose cocacola oportunity cost will be pepsi
Amin
explain the meaning of price cealing and price floor..?
Amin
Opportunity cost is the cost express in terms of forgone, alternatives after a choice have been made.
cyril
A price ceiling is the maximum price a seller can legally charge a buyer for a good or service. Consumers must not pay a price above the pries ceiling
Ntui
A price floor is that is imposed to protect consumers it can not be above the equilibrium price. It's the lowest price that producers must accept from a sales
Ntui
A price ceiling is a price control mechanism issued by the government to protect the consumers from high-priced commodities. It goes to set the highest amount a seller can charge per unit quantity of his product. N.B: This price mechanism isn't binding if equilibrium exists.
harmony
A price floor is a price control mechanism that seeks to protect the sellers by setting the lowest amount a seller can receive for his products. In this case, a seller will not sell his products for any amount less than the price floor amount.
harmony
It is argued that under optimization, since there is the second-order sufficient condition, the first-order condition is not necessary. Discuss.
John Reply
It is argued that in optimization the first part of second order condition appears opposite to their interpretation. Explain why you think otherwise.
John
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning.
Shauna Reply
we need to understand the things that manufacturer industies need to overcome the change of price, including all the all factors
Franck
hi
Jale
I expect the demand curve of such a case to be less extreme almost a horizobtal line.
tesfie
hi
Hashim
Hi
Prajwal
hi to
Sarparah
hello
Kaba

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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