Uncertainty around expected value

Estimated amount of actual losses

Expected loss frequency

Probable loss severity

Unique.

Correlated.

Independent.

Separate.

The size of the pool is limited.

The risk of loss for pool members is perfectly positively correlated.

The loss exposures in the pool are geographically concentrated.

The loss exposures being pooled are independent of one another.

Unchanged.

Decreased.

Correlated.

Increased.

The standard deviation remains unchanged.

Probability of making a payment increases.

Expected value of losses remains unchanged.

Uncertainty regarding losses increases.

.00005 or .005%

.01 or 1%

.0025 or .25%

.000025 or .0025%

.56

.00

1.5

.75

Generally a loss to one member of a pooling arrangement increases the chance of a loss to another member.

As the size of a pool increases the expected losses to each pool member become less predictable.

Pooling arrangements reduce the most risk when the loss exposures being pooled are correlated.

Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses.

The premiums collected by insurers must be held in cash to be available to pay claims.

Investment income helps keep insurance premiums at a reasonable level.

Insurance provides a source of investment funds for insurers but not for insureds.

Insurers are prohibited from investing in such things as research or technological advancements.

The primary role of insurance is to meet mandatory insurance requirements.

Insurance helps reduce the financial burden to society by compensating accident victims.

The reduction in losses paid by insurers due to risk control measures benefits individual insureds but not society as a whole.

Insurance reduces the financial consequences of loss exposures but not the related uncertainty.

Reduce social burden

Meet legal requirements

Promote risk control

Enable efficient use of resources

Ciara needs her car to get to her job and she needs her job to make car payments and pay for her car insurance.

When her car's transmission goes out a month after the warranty expires Ciara is faced with a $1 100 repair bill.

When her car's windshield breaks Ciara has to pay only $100 of the $600 cost of replacing it.

Ciara finds it difficult to come up with a $787 auto insurance premium every six months.

Insurance provides a source of investment funds for insurers but not for policyholders.

Insurers cannot invest premium income because it must be available to pay claims.

Insurers' investment income helps keep premiums at a reasonable level.

Insurers are prohibited from investing in social projects.

Indemnify individuals and organizations for covered losses.

Eliminate risk for insureds and society.

Make a profit for the insurance company's shareholders.

Meet an insured's risk management requirements.

Indemnify individuals and organizations for covered losses.

Sell insurance policies to individuals and organizations.

Educate individuals and organizations about loss prevention.

Make a profit for the insurance company's shareholders.