1. Understanding how insurance works Insurance policies are a common form of risk reduction or risk transfer in which a third party assumes some or all of the risks posed by certain dangers. Why would the company be willing to assume these risks? Consider a simplified example in which all 80,000 residents in a particular town pay $100 a month to the insurance company SecureSure for medical insurance coverage. The insurance company cannot predict whether a given resident will need hospitalization or how much any individual's care will cost. Suppose, however, it has data that on average, 10% of the citizens require care each month, costing an average of $1,100 each. The expected average cost of monthly care will be $ per person. If the insurance company sets the monthly equal to this amount, it would break even on average). In reality, the rates that an individual pays each month vary based on a process known as in which the insureds are divided into four insurance classes. The class, which is based on an insured person's determines the amount he or she pays. Consider the following example: An Insurance policy in Action Robert is a 65-year-old man who recently experienced what he thought were stroke-like symptoms and went to the emergency room at a nearby hospital. Although it turned out to be a severe case of heartburn, not a stroke, his medical bill for the hospitalization and tests totaled $4,976. Robert has an insurance policy with a $300 hospital stay deductible and a coinsurance rate of 20%. He can therefore expect a reimbursement from the insurance company of $ Complete each statement that follows with the appropriate insurance term. Robert's age and history of heart attacks increase his chances of suffering an insurable loss. This is an example of It is easier for the insurance company to predict the risk associated with an entire town than to predict the risks of a given individual. This reflects the Because Robert is older and has a history of heart attacks, he is a part of the class of insured. . 1. Understanding how insurance works Insurance policies are a common form of risk reduction or risk transfer in which a third party assumes some or all of the risks posed by certain dangers. Why would the company be willing to assume these risks? Consider a simplified example in which all 80,000 residents in a particular town pay $100 a month to the insurance company SecureSure for medical insurance coverage. The insurance company cannot predict whether a given resident will need hospitalization or how much any individual's care will cost. Suppose, however, it has data that on average, 10% of the citizens require care each month, costing an average of $1,100 each. The expected average cost of monthly care will be $ per person. If the insurance company sets the monthly equal to this amount, it would break even on average). In reality, the rates that an individual pays each month vary based on a process known as in which the insureds are divided into four insurance classes. The class, which is based on an insured person's determines the amount he or she pays. Consider the following example: An Insurance policy in Action Robert is a 65-year-old man who recently experienced what he thought were stroke-like symptoms and went to the emergency room at a nearby hospital. Although it turned out to be a severe case of heartburn, not a stroke, his medical bill for the hospitalization and tests totaled $4,976. Robert has an insurance policy with a $300 hospital stay deductible and a coinsurance rate of 20%. He can therefore expect a reimbursement from the insurance company of $ Complete each statement that follows with the appropriate insurance term. Robert's age and history of heart attacks increase his chances of suffering an insurable loss. This is an example of It is easier for the insurance company to predict the risk associated with an entire town than to predict the risks of a given individual. This reflects the Because Robert is older and has a history of heart attacks, he is a part of the class of insured