Question

QUESTION ONE: As a result of the COVID lockdown in Victoria, you have created a blog...

QUESTION ONE:
As a result of the COVID lockdown in Victoria, you have created a blog site which discusses various aspects of insurance. On your site you have a Q & A section where you invite questions from your subscribers.
Last month your subscribers sent you the following three queries:

1.      Can you explain the concept of the law of large numbers? 
2.      What is the purpose and meaning of “deeming” used by the Government to determine an age pensioners ability to claim the Age Pension? 
3.      What does the term endorsement mean on an insurance policy? 

REQUIRED:
Please respond to the above three queries and where possible provide an example to help explain the concepts.

Homework Answers

Answer #1

In a financial context, the law of large numbers indicates that a large entity which is growing rapidly cannot maintain that growth pace forever. The biggest of the blue chips, with market values in the hundreds of billions, are frequently cited as examples of this phenomenon.

KEY TAKEAWAYS

  • The law of large numbers states that an observed sample average from a large sample will be close to the true population average and that it will get closer the larger the sample.
  • The law of large numbers does not guarantee that a given sample, especially a small sample, will reflect the true population characteristics or that a sample which does not reflect the true population will be balanced by a subsequent sample.
  • In business, the term "law of large numbers" is sometimes used in a different sense to express the relationship between scale and growth rates.

Understanding the Law of Large Numbers

In statistical analysis, the law of large numbers can be applied to a variety of subjects. It may not be feasible to poll every individual within a given population to collect the required amount of data, but every additional data point gathered has the potential to increase the likelihood that the outcome is a true measure of the mean.

In business, the term "law of large numbers" is sometimes used in relation to growth rates, stated as a percentage. It suggests that, as a business expands, the percentage rate of growth becomes increasingly difficult to maintain.

The law of large numbers does not mean that a given sample or group of successive samples will always reflect the true population characteristics, especially for small samples. This also means that if a given sample or series of samples deviates from the true population average, the law of large numbers does not guarantee that successive samples will move the observed average toward the population mean

2.

Deeming is the method DVA uses to calculate income from your financial assets. Deeming assumes that any money you have invested in financial assets is earning a particular amount of income regardless of the actual return.

payments are affected by deeming :

The income testing of the following benefits is affected by deeming:

  • service pension;
  • veteran payment;
  • income support supplement;
  • age pension; and
  • Commonwealth Seniors Health Card (CSHC).

Deeming is a simpler, fairer way to assess your income. It is used for assessing income from financial assets only, because the income generated by some of these assets is not always simple to calculate. The deeming rates are set with regard to the returns available in the market from a variety of financial investments and are monitored regularly. Any future change in the rates will be timed to coincide with the March and September pension indexation increases and any other time if the financial market fluctuates significantly.

There are two deeming interest rates, a higher deeming rate and a lower deeming rate. The lower deeming rate applies up to what is called a deeming threshold. Everything above this threshold is deemed to earn the higher deeming rate. The deeming thresholds are different for singles and couples. Any changes to the deeming thresholds are made in July each year in line with movements in the Consumer Price Index (CPI).

The deeming thresholds are as follows:

  • for singles - $53,000 which is deemed to earn the lower deeming rate of 0.25%
  • for couples - $88,000 (combined) which is deemed to earn the lower deeming rate of 0.25%.

Amounts above these thresholds are deemed to earn the higher deeming rate of 2.25%.

3)

An endorsement, also known as a rider, adds, deletes, excludes or changes insurance coverage. An endorsement/rider can also be used to increase standard limits of coverage and take precedent over the original agreement or policy.

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