BU353 Chapter Notes - Chapter 5: Property Insurance, Uberrima Fides, Life Insurance
Document Summary
Because premiums almost always have a positive loading, risk-averse people will demand less than full coverage. As the loading increases, the quantity of coverage demanded is likely to decrease. Exposures with low severity of losses are not likely to be insured on an individual basis because the fixed costs associated with underwriting and distribute a policy makes the loading very high compared to expected loses. Items with low value and thus low severity are more likely to be insured if they are bundled together with other exposures. When the probability of a loss is high, insurance is less likely to be provided. With a high probability of loss, expected claim costs are high, which in turn causes administrative costs, which are proportional to expected claim costs, to be high. When losses are highly correlated across potential policyholders, the variance of the distribution of average loses also will be high.
