Insurance companies have some advantages in bearing risk. These include
I.superior ability to estimate the probability of loss;
II.extensive experience and knowledge about how to reduce the risk of a loss;
III.the ability to pool risks and thereby gain from diversification;
IV.insurance companies cannot diversify away market or macroeconomic risks

Question

Quizplus · Accepted Answer

Insurance companies have the advantage of being able to estimate the probability of loss accurately based on their experience and actuarial knowledge. They also have extensive experience and knowledge about how to reduce the risk of loss. Insurance companies pool risks from many policyholders enabling them to benefit from diversification, which reduces the overall risk. However, insurance companies cannot diversify away market or macroeconomic risks.

Insurance Companies Have Some Advantages in Bearing Risk