Hello,
I am hoping that someone can clear up the confusion on the following issue for me.
A repeated topic that I've seen come up over the course of my revision for SP8 (and also SA3) is whether we should consider pooling of risk to be an advantage or disadvantage. On one hand, pooling of risk is one of the core principles underlying the birth of the modern insurance market (Lloyd's marine insurance) with the aim being to pay a premium knowing that sometimes your premium will be used to cover someone else's loss, while in other cases other people's premiums will be covering your loss, but you end up paying less overall than having to cover the cost of every loss yourself.
However, I have seen many situations throughout questions (ASET, X assignments and end of chapter) in which, when discussing something like charging a fixed or maximum premium to all customers, there are points listed for both:
It seems to me that these are diametrically opposing points of view. In which case, which one is the correct answer?
Thanks,
T
I am hoping that someone can clear up the confusion on the following issue for me.
A repeated topic that I've seen come up over the course of my revision for SP8 (and also SA3) is whether we should consider pooling of risk to be an advantage or disadvantage. On one hand, pooling of risk is one of the core principles underlying the birth of the modern insurance market (Lloyd's marine insurance) with the aim being to pay a premium knowing that sometimes your premium will be used to cover someone else's loss, while in other cases other people's premiums will be covering your loss, but you end up paying less overall than having to cover the cost of every loss yourself.
However, I have seen many situations throughout questions (ASET, X assignments and end of chapter) in which, when discussing something like charging a fixed or maximum premium to all customers, there are points listed for both:
- Advantage - this contributes towards the pooling of risk principle
- Disadvantage - customers with a lower risk will be paying more to subsidise customers with a higher risk
It seems to me that these are diametrically opposing points of view. In which case, which one is the correct answer?
Thanks,
T