Assume that there are two groups of people who have different types of hobbies. The first group consists of poets and the second group of skydivers. Their loss distribution are shown. There are two insurers, Insurer A and Insurer B. Insurer A has a policy of charging the same rate to all policyholders, while Insurer B has the ability to identify the two groups according to their risk and charges them according to their expected claim cost.

Poets:

Outcome (x) - Loss ($ 100,000) Probability (p) - 0.05

Outcome (x) - No Loss ($0) Probability (p) - 0.95

Skydivers:

Outcome (x) - Loss ($ 100,000) Probability (p) - 0.20

Outcome (x) - No Loss ($0) Probability (p) - 0.80

(a) Find the expected claim cost for (i) Footballer, and (ii) skydivers

(b) How much would Insurer A charge each of the group for one-year policy of $100,000 (ignoring investment returns, administration costs and profit loading)?

(c) Demonstrate how Insurer B would succeed over Insurer A by attracting only low-risk individual while turning away high risk individual to Insurer A

(d) What term best describe the above situation in which Insurer A will unknowingly be burdened with high-risk policyholders

(e) What process could hinder the above situation from happening to Insurer A?