Question

1. Insurance companies utilize the law of large numbers to reduce the chance of loss for their insureds. true oR FALSE

2.   Which of the following is not a peril?

      a ) car collision

b) vandalism

   c) earthquake

   d) faulty wiring

e) none of the above are correct, on other words: all of the above are perils

3.From an annuitant's perspective, tax deferral is beneficial because :

a) current taxes are increased in return for reduced taxes later

b) money can be invested that would ordinarily be paid in current income taxes

c) tax rates in the future are guaranteed to be lower

d) tax policy varies, there may be no tax on retirement income in the future

Answer 1

1. TRUE, I

nsurance companies use the law of large numbers to lessen their own risk of loss by pooling a large enough number of people together in an insured group. The size of the pool corresponds to the predictability of the losses, just like the more eggs we deal with, the more likely we are to know how many will be cracked.

For example, an auto insurance company may record and study the number of accidents caused by a very large population of 18-year-old males. They will be able to predict how many 18-year-old males will cause an accident in a given year. They will know that in a given year there is a high probability that X number of 18-year-old males will cause an accident. Knowing this, they partially can determine how much an 18-year-old male should pay for auto insurance (excluding other factors, such as the type of vehicle, region where the driver resides, etc.) This is how the law of large numbers helps insurance providers determine their rates, and why the rates vary from one type of individual to another

2. e) none of the above are correct, on other words: all of the above are perils

3. a) current taxes are increased in return for reduced taxes later