Explain why insurance companies may find themselves at times having to refuse business.
What will be an ideal response?
Insurance companies accept risk from individuals and then spread this risk, a form of diversification. As an example, an insurance company that provides home insurance accepts the risk from an individual and pools these risks in a portfolio of policies. One situation the insurance company must be aware of is accepting too many risks from one area so that the portfolio is not diversified as well as it may be. If the company finds that it has too many homes insured in Florida, say, and not enough in other parts of the country it may leave itself exposed to larger losses due to hurricanes. As a result, the company may deny any more policies from Florida until the percentage of homes in Florida represents the percentage the company predicted in determining its expected return. Also, value at risk issues come into play in these situations. A hurricane or other natural disaster can have a very large impact on one concentrated area and insurance companies must always be aware of the value at risk. If this becomes too large for a certain area or possible event, the company may not accept any additional business from that area, (this is one reason why insurance companies purchase re-insurance.)
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Which of the following must be true if average total cost is rising?
a. Average fixed cost must be rising. b. Total fixed cost must be rising. c. Average variable cost must be falling. d. Marginal cost must be greater than average total cost.
A(n) _____ provides guaranteed benefits for those who qualify under government transfer programs such as Social Security or Medicare
a. entitlement program b. excise tax c. continuing resolution d. biennial budget e. employment benefits
The price index was 92 in 2014, and the inflation rate was 8.7 percent between 2013 and 2014 . The price index in 2013 was
a. 100.0. b. 100.7. c. 83.3. d. 84.6.
In January of 2006, the Federal Reserve
A. increased its target federal funds rate by a smaller amount than it had in several years. B. increased its target federal funds rate by a larger amount than it had in several years. C. increased its target federal funds rate by the same amount as it had in recent years. D. left its target federal funds rate unchanged.