FIN 342 Lecture Notes - Lecture 5: Co-Insurance, Influence Of Mass Media, Insurable Interest
Document Summary
Definition: the tendency of higher-than-average risks to seek insurance coverage, example: Suppose there are two kinds of people: those like ms. good have expected losses of and those like mr. bad have expected losses of (ignoring other components of the premium) Insurer can"t identify type but does know that 50% of population is good and 50% is bad. Depends on the percentage of goods and bads in the insurer"s pool: gains on the goods, loses on the bads, breaks even on underwriting if it"s a 50/50 pool. Maybe not, because she had to pay more than her expected loss. It"s a great deal for him, so he will probably buy it. Operate at a loss, insurers won"t do business at a loss, i. e. market. Societal costs: too many uninsured, bad risks paying too little for insurance, with very little incentive to reduce expected claim costs.
