Wednesday 617

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 27 of 36 Basic Tools of Finance
Section 7 of 16
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Here we consider three aspects of risk aversion
1· insurance markets
2· diversification
3· risk-return trade-off
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1-Insurance markets
One way we deal with risk is to buy insurance.
The general feature of an insurance contract is a person facing a risk pays an amount of money to an insurance company which then agrees to accept all or part of the person’s risk.
Every insurance contract in a sense is a gamble.
It is possible you won’t be in an auto accident, your house won’t burn down, and you won’t need expensive medical treatment.
To have a profitable business, the insurance company is counting on most people will not make claims on their policies.
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From the viewpoint of the overall economy the role of insurance is to spread risks around.
Having fire insurance does not reduce the risk of losing your home in a fire,
but if a fire occurs the insurance company will compensate you.
The risk of your house burning down rather than being borne by you alone
is shared by the thousands of insurance company policy holders.
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Insurance markets face two types of problems that impede their ability to spread risk.
One problem is adverse selection.
A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person benefits more from insurance protection.
A second problem is moral hazard.
When people buy insurance they have less incentive to be careful about behavior because the insurance company will pay for all or much of any resulting losses.
Insurance companies cannot fully avoid these two.
They cannot perfectly distinguish between high-risk and low-risk customers nor monitor all of its customers' risky behavior.
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The high price of insurance includes the risks of others and the profit the insurance company makes.
This is why some people, especially those who consider themselves low-risk, decide against buying insurance.
As previously mentioned, every insurance contract in a sense is a gamble – overall the “house,” the insurance company, makes 10% and the customers lose 10%, but customers are paying for peace of mind.
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they decide not to buy insurance
karera wa hoken o kōnyū shinai kimemasu
彼らは保険を購入しない決めます
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Early insurance companies. ChatGPT:
- Lloyd's of London
Established: 1688
Location: London, England
Began in Edward Lloyd's coffeehouse, where shipowners, merchants, and investors met to arrange marine insurance.
It grew into the world's most famous insurance market and remains active today.
- Amicable Society for a Perpetual Assurance Office
Established: 1706
Location: Serjeants' Inn, Fleet Street, London, England
Generally considered the first successful life insurance company.
Members paid into a common fund, which was distributed to beneficiaries when members died.
- Sun Fire Office
Established: 1710
Location: London, England
One of the first major fire insurance companies.
It became known for placing metal fire marks on insured buildings.
- The Philadelphia Contributionship
Established: 1752
Location: Philadelphia, Pennsylvania
Founded with the involvement of Benjamin Franklin.
It was America's first successful fire insurance company and still exists.
- Equitable Life Assurance Society
Established: 1762
Location: London, England
A pioneer in using actuarial science and mortality statistics to calculate life insurance premiums more accurately.
- Phoenix Assurance
Established: 1782
Location: London, England
Became one of Britain's largest fire and marine insurance companies during the Industrial Revolution.
- Mutual Life Insurance Company of New York
Established: 1842
Location: New York City, New York
One of the first major American life insurance companies and a precursor to the modern life insurance industry.
- Prudential Financial
Established: 1875
Location: Newark, New Jersey
Grew rapidly by selling affordable life insurance to working-class families and became one of the largest insurers in the United States.