RMI 2101 Lecture Notes - Lecture 9: Terrorism Insurance, Subrogation, High Standard Manufacturing Company

• School: Temple University
• Department: Risk Management and Insurance
• Course: RMI 2101
• Professor: Mccloskey

Document Summary

Insurers are willing to sell insurance at particular price: pi = price of insurance, pmax = p* + risk charge + admin(loading) Insurance demand: will individuals pay for insurance at the stated premium, pmax = most an individual will pay for insurance for a particular risk, a risk is insurable if - pi < pmax ( a market exits) Why might pi > pmax: pi too high. P* too high too many losses. Risk charge too high high uncertainty. Loading costs too high: pmax too low. Individuals underestimate the severity or frequency of the loss. Moral hazard created by disaster relief (floods) - where insurance benefits exists. Characteristics of an insurable risk: 6 ideal situations that the insurance company seeks when determining if a risk is insurable. Impact on price could lead to collapse of insurance pool, product, or market (#2) losses are accidental or unintentional. P* goes up, pi goes down, pi > pmax: solutions.