The theory of risk aversion and its utilization by the insurance Essay

The theory of lay on the line aversion and its utilization by the indemnification companies - Essay ExampleThis paper bulgelines the theory of risk aversion, and explains how insurance companies are successfully utilizing this theory to receive substantial amount of profit conducting their activities.Risk aversion is a theory that explains why people are willing to buy insurance.Risk averse means is a situation whereby individuals are willing to collapse some money in order to avoid playing a risky game this takes place even when the expected game value is in this individuals favor. A risk averse individual tends to pay more than the expected value of a game that will let him or her avoid a riskIndemnity is a principle of insurance that states puts it clearly that an insured person will only get compensation if there is a risk occurrence. On the other hand if the event does not occur then the insured will not get any compensation whether money or property. In this case the insur ance company will benefit a lot since whole the premiums paid will remain as the companys revenue.The pay off expected by the insured is always less than the premiums he pays this puts the insurance company in a better position devising it a booming business with minimal chances of loss occurrenceThe big advantage with the insurance company is that it can play games severally and leap a good deal benefits associated with the law of large numbers. The more people the insurance company insures the more it the more it will collect money to cater for administrative costs as well as profits.There is also a numerical illustration in the paper, that helps to bring out the meaning of the theory of risk aversion. The mathematical fashion model makes this theory more intelligible.o the insured it is also obvious that the bigger the pool the smaller the individuals risk of losing large amount of money ,at the same prison term the less the expected premiums.The Friedman-Savage sought to kn ow why is it that people will buy both insurance and lottery tickets against losses. His view was that this behavior of people was do them both risk averse and risk loving. The answer to this is the fact that a section of the utility function is convex while the other part is concave. Individuals give care to play it safe across the lower range but very much willing to take gambling on the lower and upper part Illustration A group of thirty people are willing to pay 120 pounds to avoid a risk of losing 15000 pounds. The group can all join together to form a mutual insurance company, collect 120 pounds from each member and pay 15000 pounds to anyone amongst the group who is unlucky and loses coming out ahead. The more people join this mutual insurance company the more the money for its administrative costs and more returns will be realized.By connection this mutual insurance company it shows that the participants are risk averse.The individuals elasticity is . Utility is an indica tor of how many percentage points one thing changes as a conclusion of a one percent change in something that affects it.