Social Insurance at Universität Mannheim

Flashcards and summaries for Social Insurance at the Universität Mannheim

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Study with flashcards and summaries for the course Social Insurance at the Universität Mannheim

Exemplary flashcards for Social Insurance at the Universität Mannheim on StudySmarter:

Why do we care about risk?

Exemplary flashcards for Social Insurance at the Universität Mannheim on StudySmarter:

Duality of risk

Exemplary flashcards for Social Insurance at the Universität Mannheim on StudySmarter:

Choice under uncertainty

Exemplary flashcards for Social Insurance at the Universität Mannheim on StudySmarter:

Risk aversion

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Loss aversion

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Insurance premium

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What is the maximum premium?

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What is the actuarial fair premium?

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Certainty equivalent wealth

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Risk premium (cost of risk)

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Adverse Selection 

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Pooling equilibrium 

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Exemplary flashcards for Social Insurance at the Universität Mannheim on StudySmarter:

Social Insurance

Why do we care about risk?
- Different degree of risk aversion for different people
- people respond differently to risk

Social Insurance

Duality of risk
- Attraction to risk as human nature
- evidence of risk aversion: people try to avoid risk

- degress of risk aversion changes with age and wealth -> Bernoulli contribution

Social Insurance

Choice under uncertainty
-maximize expected utility = weighted sum of utilities across states of the worlds
- weights=probabilities of each state ocurring

Social Insurance

Risk aversion
a risk averse person wants to be compensated on taking a higher risk
    - a risk-averse consumer requires some form of compensation for taking on risk

risk averse: decreasing marginal utility -> concave utility function

risk loving: increasing marginal utility -> convex utility function

risk neutral: constant marginal utility -> linear utility function

Social Insurance

Loss aversion
-stronger tendency to prefer avoiding loss than achieving gain of the same magnitude 
- losses loom larger than gains

Social Insurance

Insurance premium
-money paid to an insurer to be insured against adverse events

Social Insurance

What is the maximum premium?
insurance policy with the maximum premium provides the same expected utility as the uncertain situation (without insurance)
- > indifference between buying the insurance and not buying it 

- the more risk averse, the more you are willing to pay for insurance to avoid uncertainty

Social Insurance

What is the actuarial fair premium?
- insurance policy that makes the insurance company break even
= equal to the expected loss p*L

Social Insurance

Certainty equivalent wealth
-Difference between initial wealth and maximum premium
- wealth that gives the same expected utility as the uncertain situation

Social Insurance

Risk premium (cost of risk)
Expected wealth - certainty equivalent wealth

- the more risk averse, the more you are willling to pay for insurance to avoid uncertainty
- a risk loving person will not pay for insurance

Social Insurance

Adverse Selection 
When individuals know more about their risk Level than the insurer -> individuals with higher risk are more likely to purchase insurance 
-market for insurance can unravel in a death spiral 

Social Insurance

Pooling equilibrium 
Insurance companies offer a contract based on
average risk [good deal for sickly, mediocre deal for healthy but maybe better than no insurance]

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