Question

Should insurance companies spread the risk amongst all of their policyholders as is often done in automobile insurance or is there better way to deal with the matter of risk? Describe how this might be accomplished and argue why this is a good or bad practice.

Make at least 100-150 words, thank you.

Answer 1

Insurance companies should not spread the risk evenly among all the policy holders, because it brings generalization and premium of the policy also increases for those who have the lowest risk quotient. Further, there is no incentive for the people with lower risk and it increases the number of claims. So, there should be a better way to deal with it. As a part of it, there should be different groups of the policy holders on the basis of their risk profiles. A risk of higher level, should be aligned to the policy holders with higher level of risk profile and these policy holders should pay higher premium. It is a good practice, because it helps in encouraging policy holders to be sensible, avoid risky behavior and remain safe. As a result, they will be able to pay lower premium in the future and companies will have lower number of claims. So, this policy will be beneficial to insurance providers as well as policy holders.