How Insurance Works

Trading a small certain loss for a large uncertain one.

12 problems · about 21 minutes · TEKS M.M.7.A

NameDate

Figure — use these to answer the problems

A claim split between the deductible you pay and the amount covered.

You pay500

Insurer pays2500

Deductible500

Covered amount2500

Figure 1

Straightforward practice. Get the method working first.

5 problems

A $5000 claim with a $750 deductible. Insurer pays how much, in dollars?
Answer
2
Why buy insurance when its expected value is negative?
- It protects against a loss too large to absorb.
- Because claims usually pay more than the premiums.
A $4000 claim with a $1000 deductible. Insurer pays how much, in dollars?
Answer
Premium $900 plus a $1500 deductible. Total in dollars?
Answer
A $300 claim with a $500 deductible. Insurer pays how much, in dollars?
Answer

The same ideas with more to keep track of.

3 problems

A higher deductible means a higher or lower premium? 1 higher, 2 lower.
Answer
Premium $100 a month. Annual premium in dollars?
Answer
Is the expected value of buying insurance positive for the buyer? 1 yes, 0 no.
Answer

Mixed problems. Work out what kind of question it is before you start.

4 problems

Sort each risk by whether insuring it makes sense.
Write each item under the heading it belongs to: A house fire · A serious illness · A cheap phone case · A pair of headphones
Worth insuring
Not worth insuring
A $10000 claim with a $2000 deductible. Insurer pays how much, in dollars?
Answer
The Claim
A $3000 claim with a $500 deductible. How much do you pay, in dollars?
Answerdollars
The Year
Premium $1200 plus a $500 deductible paid once. Total for the year, in dollars?
Answerdollars