Question

Suppose that an insurance company wants to offer insurance for bicycle theft. They do a careful market survey and find that the incident of theft varies widely across communities. In some areas there is a high probability that a bicycle will be stolen, and in other areas thefts are quite rare. Suppose that the insurance company decides to offer the insurance based on the average theft rate. What do you think will happen? Answer: the insurance company is likely to go broke quickly! Think about it. Who is going to buy the insurance at the average rate? Not the people in the safe communities – they don’t need much insurance anyway. Instead the people in the communities with a high incidence of theft will want the insurance – they’re the ones who need it. But this means that the insurance claims will mostly be made by the consumers who live in the high-risk areas. Rates based on the average probability of theft will be a misleading indication of the actual experience of claims filed with the insurance company. The insurance company will not get an unbiased selection of customers; rather they will get an adverse selection. In fact the term “adverse selection” was first used in the insurance industry to describe just this sort of problem. It follows that in order to break even the insurance company must base their rates on the “worst-case” forecasts and that consumers with a low, but not negligible, risk of bicycle theft will be unwilling to purchase the resulting high-priced insurance. A similar problem arises with health insurance—insurance companies can’t base their rates on the average incidence of health problems in the population. They can only base their rates on the average incidence of health problems in the group of potential purchasers. But the people who want to purchase health insurance the most are the ones who are likely to need it the most and thus the rates must reflect this disparity. In such a situation it is possible that everyone can be made better off by requiring the purchase of insurance that reflects the average risk in the population. The high-risk people are better off because they can purchase insurance at rates that are lower than the actual risk they face and the low- risk people can purchase insurance that is more favorable to them than the insurance offered if only high-risk people purchased it.

Consider the bicycle example. Suppose that the insurance company must not differentiate bythe districts where theft happens. What will be the equilibrium? Why?

Answer 1

Insurance company wants to offer insurance for bicycle theft. They do a careful market survey and find that the incident of theft varies widely across communities. In some areas there is a high probability that a bicycle will be stolen, and in other areas thefts are quite rare. Suppose that the insurance company decides to offer the insurance based on the average theft rate.

Before start the answer Firstly we have to know everything related to insurance and their policies.

Insurance: This is the life cover of your product. It is a form of risk management for stolen or loss of any kind for your product or life from uncertain loss

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risk, especially if the risk is too large for the primary insurer to carry.

Parties of Insurance:-

These are some parties of insurance are available in market.

First party Insurance:- A “Named Insured” is the one who purchases and is afforded the broadest coverage under an insurance contract.
In some cases, the “first party” may refer to “an” insured who is not named on the policy but can be afforded status as an insured because of the extension of the contract’s coverage

Third Party Insurance:- Third Party insurance will typically benefit someone else bringing action against an Insured:

A third party would neither be “an insured” nor anyone affiliated with the insurance company.

A third party would normally be someone who is damaged (injured) to whom the insured is liable.

What is Theft Cover?

As the name suggests, theft cover is a type of insurance cover that insures your bike or two wheeler in case of theft or burglary. In such a scenario, the insurance company would cover the cost of the burglary or the cost of a replacement in case of theft. If a loan as taken out on the bike which is still to be repaid, the insurance company will pay the loan amount, with the difference having to be borne by you. Sounds too good to be true? But that’s exactly what theft cover under a comprehensive two wheeler insurance policy will give you.

In the event your bike is stolen, there are certain steps that have to be followed before the insurance company reimburses you for the stolen Bicycle.

After stolen the bicycle steps should be taken by the customer :-

FIR: The insured must lodge the First Information Report (FIR) with the police immediately.

Claim form: The insured should call the customer service centre of the insurance company and fill the claim form, giving information like the policy number, vehicle details, as well as the date, time and description of the incident.

Documents: Submit the duly signed claim form, copies of the registration certificate (RC) of the vehicle, driving licence, policy document (first two pages), the FIR and a letter addressed to the RTO intimating theft.
Approval, settlement: After the police submits its final ‘nontraceable report’ and the claim is approved, the insured must transfer the RC of the stolen vehicle in favour of the insurance company, hand over all sets of keys and give a letter of ..

Coverage by insurance Company:-

Once it has been confirmed that your bike has been stolen and cannot be traced, your insurer may hire a specialist investigator to trace it. These investigations may take up to 60 – 90 days. So don’t despair, but be as calm as possible.

Your insurance would pay up to the IDV that was defined while purchasing your two wheeler insurance plan.

Remember that you can reduce your premium by opting for a lesser IDV. But, it is always recommended to pay a little higher amount of premium and choose an optimum IDV. This will be your savior at the time of making a claim if at all, your Bicycle eever gets stolen in the future. You need to weigh the odds and take a call on choosing the IDV depending on certain factors (like, make & model, CC, etc.). For example, if you reside in a theft-prone area, then opting for a higher IDV is a must.

If your bike was under loan, then the insurance company would reimburse the payout amount to the bank. But, the difference amount would be borne by you.