RMI 2101 Lecture Notes - Lecture 8: Risk Pool
6 Nov 2016
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Topic 8: the use of insurance as a risk management tool. P* = ; variance = ; st. dev = ; cov = (how much risk) Amount of risk person a faces without insurance. Suppose person a buys full insurance against this loss for an afp (actuarially fair premium - p* for situation before insurance company adds in admin charge, etc. ) Suppose person a is the only customer for the insurer. Same as person a without insurance, . No risk reduction as a result of the transfer of risk from person a to insurer. Suppose now that the insurer has a risk pool of 2 individuals: person a and person b. Person a and person b face the same probability distribution of losses. Insurer decreases risk with person a and person b. Insurer"s risk p* = (note: doubled) ; variance = 2 ; st. dev = 1. 41 ; cov = . 71.
