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You can diversify risk which is almost the same thing. The whole point of insurance is that each person has x% probability of dying, so they pay x% * the sum as
by riskneural 11y ago
You can diversify risk which is almost the same thing. The whole point of insurance is that each person has x% probability of dying, so they pay x% * the sum assured, and, as the pool of insured gets large enough, there is enough cheese in the fridge.
Yes, the pool is not always large enough, so you can throw it into a reinsurer from the insurance company. Yes, the reinsurance pool isn't always large enough, so you can retrocede to a few other reinsurers for diversification.
That pool isn't aways large enough, so you can securitise away the tail risks and aggregate loss risks into a cat bond, or a pandemic bond, or a longevity swap, or something fun.
These will then in turn be bought up by pension companies, in order to diversify against their market risks, and the needle returns to the start of the song, and we all sing along like before.
- robrenaud 11y agoThey had better be paying more than x% * sum assured, or else the insurance company is going out of business.
- differentView 11y agoThey make money from the float. http://www.wikinvest.com/wiki/Float http://www.wikinvest.com/wiki/Float
- riskneural 11y agoThe price is x% of the sum assured discounted at the risk neutral rates, plus admin expenses, plus customer acquisition cost, plus a target percentage of the economic capital (because their is a wee bit of risk), plus adjustments based on your demographic's price sensitivity profile, combined with adjustments based on the market cycle. Of course, you should also factor lapse rates in. Then maybe factor in whether this is a good beginner product for new customers.