Question

1.insurance companies offer a better rate per $1,000 of coverage when purchasing larger face amounts of insurance. the premiuse is that those purchasing larger amounts are better risks. Please state at least two reasons why these applicants are a better risk:

2.for insurance company to be successful, it must apply what principle or law?

Answer 1

1. They represent a better risk because

• Those purchasing insurance with large premiums are in general concerned about the risks and tend to take better precautions to minimize the risk
• People who purchase (afford) policies with larger premiums have a better lifestyle which protects them from certain risks

2. For the insurance company to be successful, it must apply the principle of large numbers.

An insurance company must have a large base of insured people who do not raise any claims and their premiums cover the cost of claims from others. Put in simple terms, as the insurance company increases its customer base, the probability of a claim is spread over a large base and hence the overall risk for insurance company reduces.