Financial Math: How Does Insurance Work?

Why is insurance considered a necessary expense?

• It provides financial protection against potential losses.

• It is required for all vehicle purchases.

• It guarantees a return on investment.

• It ensures all medical expenses are covered.

What is the primary purpose of insurance?

• To support the economy.

• To make healthcare more affordable.

• To provide peace of mind against financial loss.

• To comply with legal requirements.

How do insurance companies generate profit?

• By charging more in premiums than they pay out in claims.

• By offering only high-risk policies.

• By government subsidies.

• By investing the premiums in the stock market.

How is risk spread in the insurance model?

• Through government intervention.

• By insuring only low-risk individuals.

• By pooling many clients under the same risk category.

• By limiting coverage amounts.

Why might someone choose to purchase insurance instead of saving money?

• Savings accounts are not secure.

• Interest rates on savings are too low.

• Insurance can cover larger unexpected expenses.

• Insurance is tax-deductible.

Why do insurance companies specialize in certain types of insurance?

• To reduce competition.

• Because they are only licensed for specific types.

• To maximize profits through expertise.

• To comply with government regulations.

What is reinsurance?

• Insurance for high-risk individuals.

• Insurance for insurance companies to limit losses.

• A government-backed insurance guarantee.

• A discount on insurance for long-term customers.

What role does reinsurance play in the insurance industry?

• It reduces the need for consumer insurance.

• It provides additional funds for claims.

• It eliminates the possibility of insurance fraud.

• It helps insurance companies manage risk.

What steps do insurance companies take to prevent fraudulent claims?

• Require a police report for all claims.

• Limit coverage to only certain types of accidents.

• Investigate claims to ensure their legitimacy.

• Only cover accidents reported within 24 hours.

What is the consequence of submitting a fraudulent insurance claim?

• A fine and claim denial.

• Mandatory insurance education courses.

• Possible jail time.

• Increased premiums.