Question

“A pooling arrangement, i.e., insurance, reduces risk for all the participants. Since almost everyone prefers lower risk, we should have full insurance for all risks.”

Give and explain three reasons why the previous statement is not likely to be true, i.e., why we would not likely observe full insurance for all risks.

Answer 1

We should not be having full insurance for all risk because-

A. It would be leading to a lot of outflow of premium because of taking insurance for various kinds of risk because it is not possible to hedge all the risk.

B. All those losses which are of lower amount and they are almost offering very frequently are not to be insured because they can be estimated almost accurately and can be mitigated through self-management to large extent.

C. It is not possible to eliminate all the risk associated with the existence of the human being because future will always be uncertain and there is no predictive tool for assessment of the future so all those relevant risk are to be insured which can cause optimum damage.