Risk, Insurance and Pooling · seed 1 · A4, ink-friendly. The answer key prints on its own page for grown-ups.

Sharing risk so one loss cannot ruin you

Civics & Economics · Economics · ages 15-16
Name ______________________   Date ____________

  1. Why is a premium higher than the expected loss?

    • It must also cover admin, profit, and a buffer for unlucky years
    • It must pay for fireworks
    • Premiums are picked at random

  2. A flood has a 1 in 100 chance of causing 10,000 coins of damage. Type the expected yearly cost.

    Answer: ______________

  3. Why does insuring a flat cost a fraction of rebuilding it?

    • Because houses never burn
    • Because pooling spreads the rare loss across thousands of payers
    • Because insurers dislike money

  4. In a voluntary scheme, who signs up first and what follows?

    • Careful people join first and prices fall
    • High-risk people join first, claims beat forecasts, and prices rise
    • Nobody ever joins

  5. A quoted premium of 140 coins covers a risk with expected cost 100. What is the markup for?

    • Admin, profit, and a buffer for unlucky years
    • A holiday for the neighbours
    • Nothing at all

  6. What is a deductible for?

    • The slice you pay yourself, cutting small claims and careless behaviour
    • A bonus paid to every claimant
    • A ban on all policies

  7. Premiums rise, careful drivers leave, and the pool worsens again. What broke the pool?

    • The deductible was too high to read
    • Too many safe drivers
    • Adverse selection: prices stopped tracking the risks left inside

  8. Adverse selection means careful low-risk people are always the first to buy cover.

    Circle one:   True   False

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Answer key

For grown-ups. Fold this page away before handing over the rest.

Sharing risk so one loss cannot ruin you W1-mt_zrMeXUHV4Y-s1

  1. It must also cover admin, profit, and a buffer for unlucky years · Average claims are only the start; running the pool costs extra.
  2. 100 · Divide 10,000 by 100: the expected loss is 100 coins a year.
  3. Because pooling spreads the rare loss across thousands of payers · Shared independent risks turn ruin for one into small bills for all.
  4. High-risk people join first, claims beat forecasts, and prices rise · The keenest buyers are the likeliest claimants, which worsens the pool.
  5. Admin, profit, and a buffer for unlucky years · The 40 above expected claims keeps the insurer running and safe.
  6. The slice you pay yourself, cutting small claims and careless behaviour · Your own slice keeps premiums lower and locks back on bikes.
  7. Adverse selection: prices stopped tracking the risks left inside · Each exit concentrates risk, so the spiral feeds itself.
  8. False · The riskiest sign up first, and the careful drift away as prices climb.
Worksheet · LightMySky