Question

Insurance companies collect annual payments from homeowners in exchange for paying to rebuild houses that burn down. a) Why should one be reluctant to accept a $300 payment from one's neighbor to replace his house should it burn down during the coming year? b) Why can an insurance company make that offer? a) Choose the correct answer below. O A. It would be foolish to insure one's neighbor's house for $300 because although one would probably collect $300, there is a chance to end up paying much more than $300. That risk is not worth the $300. OB. It would not be foolish to insure one's neighbor's house for $300 because one would probably collect $300, although there is a chance to end up paying much more than $300. That risk is worth the $300 O C. It would be foolish to insure one's neighbor's house for $300 because one would probably lose the $300 to replace the house. The chance of the house burning down is fairly high. O D. It would not be foolish to insure one's neighbor's house for $300 because one would probably collect $300. The chance of the house burning down is fairly low. b) Choose the correct answer below. O A. The insurance company pays for an effective legal department. The overwhelming majority of customers pay and never receive coverage from a claim covered by the insurance. The customers who do have a claim are rarely able to have it resolved by the insurance policy. The relative risk to the insurance company is low. OB. The insurance company can't make these offers. Insuring customers for claims like these is not cost effective. The insurance company earns a profit from other means to pay for insuring customers. The relative risk to the insurance company is high. OC. The insurance company insures many people. The overwhelming majority of customers pay and never have a claim. The few customers who do have a claim are offset by the many who simply send their premiums without a claim. The relative risk to the insurance company is low. OD. The insurance company is better at preventing fires. The overwhelming majority of customers pay and never have a claim. The probability of a house burning down is much lower when insured by a company. The relative risk to the insurance company is low.

Answer 1

a) option A is correct ( for even though the chance of burning down the house is very low, but if the event occurs that would be very costly to you compared to $300 you receive)

b)

option C is correct