GEICO Insurance has received applications from two drivers l…

GEICO Insurance has received applications from two drivers looking for auto insurance policies.  Based on GEICO’s risk classification process, they have come up with the following estimates for the two drivers:  Driver A’s Expected Value (Loss) = $500 Driver B’s Expected Value (Loss) = $1,000 Based only on the above information: which driver will be charged a higher premium, and more importantly, why? 

One of the main reasons that insurance works as a financial…

One of the main reasons that insurance works as a financial instrument is the due to the concept of risk pooling. From the perspective of the individual loss exposure (either a person or a firm): If an individual person or individual firm joins a risk pool > the overall risk faced by that individual person or individual firm = [option1]   However, from the perspective of the insurance company:  As more and more individual loss exposures are added to the insurance company’s risk pool > The overall risk faced by the insurance company (as measured by the coefficient of variation) =[option2]