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How would you explain your use of the Law of Large Numbers as a critical tool in establishing rates?

(2 pts) Provide an accurate definition of insurance and explain three critical functions of the insurance process (hint: see the slides in Assignment 1: Introduction and Overview of Insurance).




  1. (2 pts) Assume you are an actuary for ABC Insurance Company. You need to explain to your Board of Directors how you most accurately determine rates for life insurance policies. Currently, you are aggregating numbers and need to calculate rates for life insurance on 32-year old male applicants.


  1. How would you explain your use of the Law of Large Numbers as a critical tool in establishing rates?


  1. Explain two conditions that need to be included in the life insurance underwriting process or clauses in the life insurance policies that would help you correctly estimate rates for these 32-year old males. For example, you need the applicant pool to have similar health conditions to accurately pool the group. How can you ensure this homogeneity?




  1. (1 pt) A. How does pure risk differ from speculative risk?


(1 pt)  B. How does a valued policy differ from a contract of indemnity?




  1. Individuals and businesses often use risk management as a means of identifying and assessing financial risks. To eliminate or reduce exposure to a specific financial risk, an individual can use at least one of four risk management techniques: avoid the risk, control the risk, transfer the risk, or accept the risk.




  1. (1 pt) Please briefly discuss each of these four techniques and provide an example of how you could personally use each method.




  1. (2 pts) From the answer choices below, select the response that correctly describes an individual controlling the risk of financial loss.




(1) Michaela insists that all passengers riding in her automobile wear seat belts at all times.




(2) Michael, a self-employed graphic design artist, purchased a disability income insurance policy that will provide him with monthly income benefits if he becomes totally disabled.




(3) Because he is concerned about suffering neck and back injuries, Mickey never rides roller coasters at amusement parks.




(4) After purchasing a new computer, Minnie rejected the manufacturer’s offer of an extended warranty on the new computer system.




  1. (1 pt) From an insurer’s standpoint, the tendency of individuals who believe they have a greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals is known, by definition, as______________.

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