Sharing the Risk
Written by Studio AM.
Your result
- Words per minute
- Score
- Pace
Words per minute mean something only with the score beside them. They describe this passage on this read. With fewer than 3 right, try the next slower pace.
Choose a pace and select Start. The passage is paced and timed, then the questions check what you understood. How pace mode works
Reading time 0:00
Imagine an insurer covering one thousand similar houses. It estimates how many covered losses the group might suffer, without knowing exactly which households will claim. This simple model helps explain insurance; real risks depend on buildings, location, weather and other conditions.
Each household pays a premium for coverage. The insurer combines these payments to help pay covered claims according to each policy. An individual loss can be uncertain even when patterns across a large group can be estimated. Events such as a major storm can affect many homes together, so insurers also need resources for unusually large losses.
Coverage can change behaviour. Someone who expects insurance to pay might take less care to prevent damage. Economists call this moral hazard. Another problem arises when people with higher risks are more likely to buy insurance than the original price allows for.
Insurers use deductibles, inspections, coverage rules and risk-based prices to address these problems. A deductible is the part of a covered claim the policyholder pays. These arrangements balance sharing losses with keeping insurance workable and encouraging care. They can also raise questions about affordability and fairness.
The passage is hidden while you answer. It comes back with your result.
Questions
Choose an answer. The explanation appears after you answer.
-
Question 1 of 4
Which sentence best states the main idea?
The answer is C: Insurance shares uncertain losses and uses rules to manage the risks involved.
The passage explains pooling, prediction, problems, and the tools used to manage them.
-
Question 2 of 4
What payment does a household make for insurance coverage?
The answer is D: A premium
The household pays a premium for coverage. A deductible is its share of a covered claim.
-
Question 3 of 4
Why would covering homes in several regions help with the risk of one local storm?
The answer is A: The same storm would be less likely to damage all the insured homes.
A local storm can damage nearby homes together. Spreading coverage across regions can reduce that concentration, though it cannot remove all risk.
-
Question 4 of 4
In this passage, “moral hazard” refers to
The answer is B: taking less care because another party will bear much of the loss
The passage names moral hazard after describing reduced care when the pool will pay.
Score: none answered yet.