Insurance Fundamentals: Risk, Society, and Reciprocal Exchanges

This assignment explores fundamental insurance concepts, differentiating between insurable and non-insurable risks, and highlighting the significance of insurance for both society and individuals. The document identifies scenarios where insurance is applicable, such as health insurance covering genetic disorders and cancer, while excluding risks like wear and tear of a computer or gambling losses. It emphasizes the societal benefits of insurance, including reduced healthcare costs, financial stability, and support for victims of loss, along with its role in economic growth. Furthermore, the assignment delves into the individual advantages, such as financial compensation, investment opportunities, and financial security during loss. The concept of physical hard is also introduced. The document also describes reciprocal insurance exchanges, detailing their structure, operation through attorney-in-fact management, and the flexibility they offer, including the option for assessable and non-assessable policies. The assignment concludes with a list of relevant references.

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1)
i. Insurable risk does not exist. This is because rusting occurs due to tear and wear. The value
of the product reduces by rusting. Therefore rusting is a deterioration that occurs within a
lifespan of an iron (Anbarci, 2015).
ii. Insurable risk exists. This is because genetic disorders can be insured under health insurance.
iii. Insurable risk exists. Developing cancer can be insured under health insurance.
iv. Insurable risk does not exist. A computer operates under certain duration. It will finally stop
working since it is prone to wear and tear hence this cannot be insured.
v. Insurable interest does not exist. Losing money in the casino is gambling which is different
from insurance.
2) Importance to the society
i. Medical insurance helps to reduce healthcare cost hence improves health in the society.
ii. Insurance helps to pay for the losses that occur. This means that the people will not directly
withdraw money from their accounts hence helping the society to manage uncertainty in cash
flows (Olivieri, & Pitacco, 2015).
iii. Insurance helps to reduce the burden of uncompensated victims of loss in the society.
iv. Insurance helps to develop the society since it provides sources of investments.
v. Insurance promotes economic growth in the society through mobilizing savings.
Importance to individuals
i. Insurance helps to compensate individuals hence reducing the losses
ii. Insurance provides source of investments to an individual.
iii. It acts as a source of saving.
iv. It helps retain the financial position of an individual in the event of a loss.
v. Medical insurance helps to pay health bills since the company can pay part or the whole bill hence
reducing the burden of an individual.
3) Physical hard is a situation that is not dangerous but may cause much physical discomfort that cannot be
reduced by protective tools or equipments (Zhi-gang, & Han, 2013).
Examples:
 The number of room the restaurant has.
 The location of the toilets

 Location of the kitchen
 General hygiene of the restaurant
 Geographical area and position of the restaurant.
 Qualification of staff employed
 Layout of the whole building
 Location and direction of the windows
4) Reciprocal insurance exchange is a group of individuals who agree to share each other’s insurance
risk through the exchange of insurance contracts (Taroun, 2014).
Each member of this group appoints an attorney-in-fact who manages the affairs of the exchange.
Members of this group agree to pool risk by acknowledging a reciprocal agreement of indemnity
which makes each an insurer and insured by each entity in the reciprocal exchange.
Reciprocal insurance exchange is unincorporated entities operating through individual agreements.
Subscribers sign an indemnity agreement and pay premiums into an allocated account.
When a subscriber suffers a loss that is outlined in the exchange’s agreement, the pooled premiums
are used to pay the claim.
Each subscriber’s liability end according to the cost of their individual policies
Reciprocal insurance exchanges are managed by the attorney –in –fact. The AIF is hired by the
exchange and has the mandate of overall administration, promotion and underwriting.
Reciprocal insurance exchanges are flexible and their focus is based on the policyholder.
Reciprocal insurance companies can issue assessable and non- assessable policies. A non-assessable
policy keeps the policyholder from being charged more amount of money if the cost of operating the
reciprocal is higher than the expected.
This means that the financial liabilities of the policyholder are limited to the cost of the policy.

References
Anbarci, N. (2015). Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood
Industry. By Howard C. Kunreuther, Mark V. Pauly, and Stacey McMorrow. Cambridge and New
York: Cambridge University Press, 2013. Pp. xii, 329. Journal of Economic Literature, 53, 124.
Olivieri, A., & Pitacco, E. (2015). Introduction to Insurance Mathematics: Technical and financial features
of risk transfers. Springer.
Taroun, A. (2014). Towards a better modelling and assessment of construction risk: Insights from a
literature review. International Journal of Project Management, 32(1), 101-115.
Zhi-gang, Z., & Han, C. (2013). Risk Perception and the Fluctuation of Insurance Demand——A
Theoretical Proof Based on the Optimal Insurance Model. Insurance Studies, 5, 002.