1. Explain how an insurance company can take risk from millions of people but reduce the risk to the insurer
2. Two people buy a life insurance policy. The policies are identical. Except that one is a man and the other is a woman, the two present exactly the same risk to the insurer (e.g., same age, same health history, etc.). The woman will pay a lower premium than the man.
b. Is that fair?
c. Do you understand that if the same two folks buy a lifetime annuity, the woman will get a lower monthly payment from the insurer than the man will? Why?
3. Explain the terms “financial intermediation” and “financial disintermediation.”
Which one is bad for insurers?
4. Distinguish between a “valued” policy and an “indemnification” policy.
Give an example of each.
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