Insurance Microeconomics Homework Help
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It is true that the risk is transferable from one person to the other. This is possible in the person who is actually ready to bear it willingly. This person is termed as the speculator. Another good way to deal with the risk is risk pooling. This is used in the system of insurances. The idea behind the insurance scheme is very simple in nature.
Let us take an example to illustrate this in a better way. In case you are considering thousand houses. These thousand houses pay an amount towards a common fund. It is the same amount that has to be paid by each one of them, irrespective of the size of the house they live in. In case the house of someone burns, they get the amount of compensation through the insurance. This would be from the common fund that is collected from the thousand houses, which would be a large sum when it is from so many people. Similar is the case of the insurances too.
The similar situation occurs in the case of health insurances too, that are very much prevalent in these days. It is seen that the premium amount that is paid by each one is a very minimal one, but when the same sum is collected by the insurance company from a number of people, it becomes a large sum. In case a person who is insured falls sick, he can avail the treatment for which the insurance will pay him. Though the sum he pays is little, the benefits are good.
What happens in case it is not used?
In case you are in no situation to claim the insurance, and there is no need that arises for it, there is nothing that can be done. The money you have paid towards the insurance will go to the people who are in need of it.
Then there is the chance of moral hazard. This can be very well explained with the health insurances. There are cases when people try to over utilize this insurance. From the hospital side, they know that the person is insured and they run the patient through a number of tests in order to get more money. The patient would not be worried about the money either, as the insurance company would take care of it. This would be a moral hazard indeed. The same is the case with the patients too. They know that they are insured, and they tend to seek the help of the doctors in case of any minor illnesses too for which there is no need to go to the doctor repeatedly. These are the possible moral hazards in case of the health insurances. This way there are hazards in case of the other insurances too.
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