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Total damage  =  (60 × $100) + (30 × $1,000) + (10 × $15,000)  =  $600 + $30,000 + $150,000  =  $186,000

If each of the 100 drivers pays a premium of $1,860 each year, the insurance company will collect the $186,000 that is needed to cover the costs of the accidents that occur.

Since insurance companies have such a large number of clients, they are able to negotiate with providers of health care and other services for lower rates than the individual would be able to get, thus increasing the benefit to consumers of becoming insured and saving the insurance company itself money when it pays out claims.

Insurance companies receive income, as shown in [link] , from insurance premiums and investment income. Investment income is derived from investing the funds that insurance companies received in the past but did not pay out as insurance claims in prior years. The insurance company receives a rate of return from investing these funds or reserves. The investments are typically made in fairly safe, liquid (easy to convert into cash) investments, as the insurance companies needs to be able to readily access these funds when a major disaster strikes.

An insurance company: what comes in, what goes out

The illustration shows that premiums from customers and investment income goes to insurance companies, and insurance companies then produce payments to customers, expenses, profits or losses.
Money flows into an insurance company through premiums and investments and out through the payment of claims and operating expenses.

Government and social insurance

Federal and state governments run a number of insurance programs. Some of the programs look much like private insurance , in the sense that the members of a group makes steady payments into a fund, and those in the group who suffer an adverse experience receive payments. Other programs protect against risk, but without an explicit fund being set up. Following are some examples.

  • Unemployment insurance : Employers in every state pay a small amount for unemployment insurance, which goes into a fund that is used to pay benefits to workers for a period of time, usually six months, after they lose their jobs.
  • Pension insurance : Employers that offer pensions to their retired employees are required by law to pay a small fraction of what they are setting aside for pensions to the Pension Benefit Guarantee Corporation, which is used to pay at least some pension benefits to workers if a company goes bankrupt and cannot pay the pensions it has promised.
  • Deposit insurance : Banks are required by law to pay a small fraction of their deposits to the Federal Deposit Insurance Corporation, which goes into a fund that is used to pay depositors the value of their bank deposits up to $250,000 (the amount was raised from $100,000 to $250,000 in 2008) if the bank should go bankrupt.
  • Workman’s compensation insurance : Employers are required by law to pay a small percentage of the salaries that they pay into funds, typically run at the state level, that are used to pay benefits to workers who suffer an injury on the job.
  • Retirement insurance : All workers pay a percentage of their income into Social Security and into Medicare, which then provides income and health care benefits to the elderly. Social Security and Medicare are not literally “insurance” in the sense that those currently contributing to the fund are not eligible for benefits. They function like insurance, however, in the sense that regular payments are made into the programs today in exchange for benefits to be received in the case of a later event—either becoming old or becoming sick when old. Such programs are sometimes called “social insurance.”

Questions & Answers

why is the marginal curve u shaped
jake Reply
which of marginal curve?
begyere
marginal cost curve
jake
critical use of tariffs and non tariffs on exports and imports
Natukunda
what is demand function
uju Reply
demand function is the mathematical representation of price and quantity demanded of goods and services at various prices at a given time .
King
Demand function is an equation which shows the mathematical relationship between the quantity demanded of a good and the values of the various determinants of demand.
Bon
why would division of labour without trade not work
Frederick Reply
as far there is an output as a goal... trade can't be exempted... because the sole reason for division of labour is for an effective and efficient output or outcome.. with such exchange trade has taken place. .
Agha-Aiguokhian
Please what is paradox of value
rakia
what is the features of monopoly market? how it is different from monopolistic market?
alisha
how does scarcity described as the efficient byway to allocate resources in a free market?
God Reply
scarcity gives or births a rational thinking to an individual or state economy in the distribution of revenue or income to the right channels of their ends... assuming the market has the features of a free market (free entry and exit, close substitutes, market price control etc)
Agha-Aiguokhian
wath is the meaning the macro economics
Jimcaale Reply
What is the way out of Scarcity
Samuel
a state referenced economic study, the manner or behavioural pattern of a state choice in making economic decisions in satisfying their ends
Agha-Aiguokhian
Thanks brother
Samuel
what is macro economics
Balogun
is the study of a national economy as a whole
Rhoda
thanks
Balogun
what is micro economics
Balogun
micro is not the study of the entire economy as a whole. that is macro economics.
Brock
micro focuses more on decisions that individuals and firms make but also uses examples of countries regarding production.
Brock
I think is why some people get mixed up.
Brock
thanks a lot
Balogun
yes ,I think that is right
rene
how would you use budget constraints to explain trade off?
begyere
what is the difference between wants and needs as in economics
rene
wants may be unlimited but needs have the limit on the base of effort to pay.
Dambar
who n who is d founder of economic. txn
Ojo
adam smith is the founder of modern economics but previous than we can read ununified economic thought of kautilya and others.
Dambar
thanx very much
rene
In economic, the idea of survival is real, meaning someone would die with out the needs being met.This includes things like food, water, and shelter. A wants, in economic, is one step up in the order from needs and is simply something that people desire to have, that they may, or may not, obtain.
Richlyn
In our place, we had a guy who started business by collecting funds from different people giving them back 15 percent of their money as monthly interest. He worked for 2 to 3 years. Then slowly he started reducing the monthly interest to 10 percent. just in not more than two weeks he started,,,,,,,,
Bona
claiming that his business has collapsed. what do you think is the secret behind this issue. what advice should you give to the victims. Cos most contributed 1000000 South Sudanese pounds.
Bona
when total utility is constant, marginal utility do what?
rasheed Reply
Why is it that whenever I ask a question no one hears me out
Dominic
😊😊
Konadu
This is deals with only 1producer 1producer 1consumer
Motasay Reply
Oligopoly
Gh
thanks for you answer
Qaasim
With two buyers n sellers
Motasay
nothing only I study
Qaasim
still oligopoly That is when there is a limited buyer and seller in the industry. There are no perfectly elastic market entry, that is for both the price taker and the seller
Gh
thanks for your advice
Qaasim
welcomed bro
Gh
we can ask our doubt also isn't
Rohit
Yea you can as well
Gh
Like "beauty opportunity cost lies in the eyes of the beholder"discuss with practical examples
Dominic
Criticism of scarcity definition
No Reply
life is all about scarcity. there is a big reason behind that
Hassan
tell me the whole
No
as we are Muslims
Hassan
so what
No
we believe that our Allah. the God of Universe is Examining each and every one on the planet this Scarcity. the only place there is no scarcity is Aakhiro Doomsday
Hassan
i want Explanation ?
No
theory
No
You have came back our book of Quran
Hassan
Make some of our basic needs not available. For example like if we need a particular drugs to cure a virus ohh disease because if the scarcity of it it may lead to death
Motasay
what men gdb
Jimcaale Reply
with men government demand price
Jimcaale
how to draw demand curve
Michael Reply
What are the distinction between trade off and opportunity cost?
Eric Reply
what is monopoly
Mary Reply
What are the sources of monopoly
Mary
Sources of Monopoly Power Monopoly power is influenced by the following factors: Barriers to entry Number of competitors Advertising Degree of product differentiation The larger and more expensive the barriers to entry the greater the monopoly power The smaller the number of competitors in th
edward
monopoly occurs when specific enterprise supplies goods and controls the market.
sade
i think the sources of monopoly are barriers to enrty and product differentiation.
sade
Monopoly is a market structure characterized by a single seller, selling a unique product in the market in which s/he faces no competition, as s/he is the sole seller of goods with no close substitute.
edward
Monopoly is a market structure where the production of goods and services coupled with price determination of such commodities are left in the hands of a sole producer. Such factors are; Perfectly inelastic competition, High market barricade, High cost of raw materials,
Gh
what is price discrimination monopoly
sandra Reply
Charging different sets of consumers different prirces for the same good or service, for reasons not involved in cost of production. There are 3 degrees of price discrimination.
Darren
what are the 3 degree
obed
hello
Oparaugo
What up guys
Divine
what are four sources of monopoly
dora Reply
examples of what cause demand and supply to shift to the left.
Verte Reply
hello
Konadu
hi
Yaman
how are you
Yaman
are you fine
Yaman
hii
Liya
Why is there a trade off between inflation and employment? Give a situation to clear it up please
Kurt

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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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